Stifel Financial Corp (SF) 2005 Q4 法說會逐字稿

Good morning. My name is Carla and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial fourth-quarter and year 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).

I would now like to turn the call over your host, Mr. Jim Zemlyak, Chief Financial Officer of Stifel.

Thank you, Carla. Good morning, everyone. This is Jim Zemlyak 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 fourth quarter and full fiscal year ended 12-31-05. Please note that is 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 risks and uncertainties, please see the factors affecting the Company and the financial services industry in the Company's annual report on Form 10-K and management's discussion and analysis results in the Company's quarterly reports on Form 10-Q.

Before we turn over the presentation to Ron Kruszewski, I would like to remind everyone that slides are available at www.stifel.com for this conference call. With that, I would like to turn the call over to Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thank you, Jim. We'll start with a fourth quarter update. Again, we're trying something a little bit different in that we're supplementing this call with some slides. And as Jim said, for those of you that have dialed in, you can follow along and download the presentation at our website.

First of all, for the fourth quarter, I would just tell everyone that there was a lot of noise in the quarter, as you would expect. We completed a significant merger transaction and had a lot of things going on.

Three things that I would point out to start. First of all, we incurred approximately $3.1 million in integration expenses, primarily severance that related to a reduction in force plan that we implemented at Stifel Nicolaus in relation to the merger.

Second, as you probably can expect, the merger announcement that we did initially on September 12, 2005 caused disruption; in fact, some significant disruption for Stifel's what I would call legacy Equity Capital Markets business.

And then finally, we did have one month of combined business. So when you throw that all together, it is somewhat difficult to get a comparative picture as to what happened.

Going along with slides here, we will look at the fourth quarter highlights, and I would ask Jim to comment on the fourth quarter.

Thanks, Ron. Today, Stifel reported unaudited quarterly net income of $4.8 million or $0.38 per diluted share on record net revenues of $75.7 million for the quarter ended 12/31/05 compared to net income of $7 million or $0.56 per share on net revenue of $64.3 million for the comparable quarter of '04.

Net income for the current quarter was impacted, as Ron discussed, by acquisition-related costs, primarily severance of $3.1 million or $0.14 per diluted share associated with the Legg Mason Capital Markets business from Citigroup. Excluding those charges, the Company's net income was $6.6 million or $0.52 per diluted share.

The Business segment results for the three months ended 12/31/05 include the following. The Private Client Group net revenues for the fourth quarter of 2005 were $50.7 million, an increase of 7% from the fourth quarter of '04, but a 1% decrease from the third quarter of '05. PCG recorded an operating contribution of $12.7 million, a 10% increase from the fourth quarter of '04 and unchanged from the third quarter of this year.

Equity Capital Markets, ECM, recorded net revenues of $17.2 million, a 66% increase from the same quarter last year and a 107% increase from the third quarter of '05. ECM operating contribution totaled $5.2 million, a 29% increase from the fourth quarter of '04 and a 121% increase from the third quarter of '05. The Company led or comanaged 16 equity, debt, closed-end funds or trust preferred offerings during the fourth quarter of 2005 compared to 27 in the same period one year earlier and 22 during the third quarter of '05.

Fixed Income Capital Markets posted net revenues of $6.5 million, an increase of 32% from the prior-year fourth quarter and a 117% increase from the previous quarter. During the 2005 fourth quarter, Fixed Income recorded an operating contribution of $975,000, a decrease of 34% from the prior-year fourth quarter, but an increase of $1 million from the previous quarter. The Fixed Income Capital Markets [senior or] co managed 27 offerings during the fourth quarter of '05 compared to 32 offerings in the same period one year earlier and 29 offerings during the third quarter of 2005.

Thanks, Jim. Before we move to the year review, I would just add a little color. As I said, our legacy Equity Capital Markets business experienced some disruption in the quarter. Yet Jim just noted to you that Equity Capital Markets had a 66% increase in revenues for the quarter and 107 from the third quarter. And obviously, operating contribution had the same large increase quarter-to-quarter.

So the answer to what appears to be conflicting statements is that the historical business was down significantly in October and November, and then we combined with our new partners in our first month in December, which caused the quarter to show increases. But certainly October, November were below plan and expectations for the firm.

With that, I would ask Jim to take a look at the year review. I am on slide 6, for those of you that are following along.

Thanks, Ron. For the full year ended 12/31/05, the Company posted net income of $19.6 million or $1.56 per diluted share on record net revenues of $264 million, compared with 23.1 million or $1.88 per diluted share on net revenue of $246.8 million for the same period one year earlier. Current net income includes acquisition-related charges incurred in the fourth quarter noted above. Excluding acquisition-related costs, net income for the year was $21.5 million or $1.71 per diluted share.

Net income for the year ended 12/3/04 included $1 million tax benefit or $0.08 per diluted share, recorded in the first quarter, resulting from the settlement of [an estate] tax matter covering a number of years. Excluding the current acquisition-related charges and the prior year adjustment, net income decreased 3% or $0.09 per diluted share.

For the Business segment results for the 12 months ended 12/31/05, the Private Client Group net revenues for '05 were $197.4 million, an increase of 5% from the same period of '04. PCG operating contribution totaled $48.2 million, virtually unchanged from the $48 million recorded in the same period one year earlier. Equity Capital Markets recorded revenues of $43.4 million, a 12% increase from the same period last year. Equity Capital Markets' operating contribution totaled $13.6 million, a 9% increase from '04. The Company led or comanaged 81 equity, debt, closed-end funds or trust preferred offerings during '05 compared to 87 in the same period one year earlier.

Fixed Income Capital Markets posted net revenues of $18.2 million, a 9% increase from the prior year. During '05, Fixed Income recorded an operating contribution of $2.4 million, a decrease of 21% from the prior year. Fixed Income managed or comanaged 139 offerings in '05 compared to 143 offerings in the same period on year earlier.

It should be noted that for segment data reporting, the Other Unallocated for the quarter includes the acquisition cost from Legg Mason, as we have discussed.

Thank you, Jim. I would like to turn at this point to an update on the merger and share some numbers, both currently and at least what the stock-based compensation charges are going to look like going forward. Obviously, when I talk about the merger, I'm talking about the Legg Mason Capital Markets associates. We closed the transaction on December 1, 2005, and simply, I could not be more pleased with the integration.

The Fixed Income business was fully converted on the day of close, December 1, with virtually no hiccups at all. All of the equity systems were fully integrated on December 12. And all in all, I would say it was the smoothest technology integration in my 20-plus years in the business. And it is a testament to a lot of hard work by a lot of people, but the integration was fully completed 12 days after we closed the merger and things are running smoothly today.

More importantly, on the people side, our new partners and my existing partners have integrated culturally, business, you name it, in a fabulous manner. It is as if we have been partners for a long time and I am just very pleased with how things have gone. Enough said.

So what does the new Stifel look like? Well, as I have said before, the new Stifel has one of the largest domestic equity research franchises off Wall Street. Today, we have approximately 1800 associates in 113 offices in the United States and Europe. Our Private Client Group manages $27 billion in client assets. We have broad institutional equity and fixed income origination and distribution capabilities. We have an extensive investment banking expertise across a number of verticals, and we have market-recognized fixed income expertise. The firm is very, very, well-positioned today to serve our clients in a top-notch manner.

Let's recap the merger -- and I am on page 9 of the slides. First of all, I look at the merger in two parts -- what did we pay the seller and what was allocated to our new partners. First of all, to just update you, the consideration to the seller was five parts, if you will. First of all, on the day of close, we purchased net trading inventory at fair value; it was approximately $46 million of marketable securities. That was net of long and short.

Second, we purchased net assets that were valued at $12.2 million. We assumed certain liabilities, including leases, contracts and other items related to the continuing operation of the business. We did not assume any liabilities incurred prior to the closing.

And finally, we paid a $7 million premium at closing, with the potential to pay an additional $30 million over the next three years, based upon the performance of the combined Capital Markets business.

The second part is what we paid, if you will, or what we allocated to the people who drive the business, which were the LM associates. This had two parts. The first part was private placement of 1 million plus shares, which we had offered initially at $25 a share. That was the price of our stock at the time that we announced this transaction back in September. And the second component was approximately 1,800,000 of restricted stock units, which have three-year vesting. I would ask Jim just to update you on both of those. First of all, the price private placement.

On January 23rd of this year, the Company completed its private placement of 1,052,220 shares of its common stock at $25 per share. The shares were purchased by key associates of Legg Mason Capital Markets. The company is required to charge due compensation difference between $25 per share and the fair value of $34.27 per share. As a result, the Company will incur a non-cash compensation charge of approximately $9.8 million in the quarter ended March 31, '06.

As it relates to the stock units, on January 2 of this year, the Company granted 1,807,610 restricted stock units to key associates of Legg Mason Capital Markets. The units were granted with a measurement price of $37.59 per unit. The units vest rapidly over a three-year period and, accordingly, the Company will incur an annual non-cash compensation charge of approximately $23 million.

Thank you, Jim. Let's take a look at, first of all, the balance sheet impact of the private placement and then we will look at the income statement impact, and then we will get to some questions.

First of all, with respect to the balance sheet, the private placement -- we ended the year with approximately $155 million of equity in 10.1 million shares outstanding, resulting book value of $15.31. We issued 1,052,000, as Jim had said, shares. And then we also, because there was compensation expense to the associates -- and as Jim said, there was a compensation charge that the Company would had to take -- we purchased back approximately 109,000 shares to satisfy tax withholding.

And then of course we also had to charge to our equity after-tax $5.9 million after-tax relating to the offering. Net-net, pro forma after the private placement, the equity of the Company is approximately 182.8 million, with 11,072,000 shares outstanding, which results in a pro forma book value of $16.51 after the private placement. As you can see, the private placement was accretive to book value.

If you look at the income statement impact of what is going on here, the private placement will result again in a onetime expense of pretax of $9.8 million that will be recorded in the first quarter of 2006. And the stock units will result in an annual pretax charge of $22.6 million for the next three years.

If you look forward on the next slide -- again, slide 14 -- this is where I want to just explain how we're going to look at this going forward. We are going to direct our investors to focus on what we will characterize as core earnings. The difference between core earnings and GAAP earnings will be the stock-based compensation, which we believe represents acquisition costs. These costs, if you will, are amortized expense over three years. We believe that the core earnings, as we will define it, represents the true earnings power of the Company. And as you can see, if you are following along, that in the first quarter of 2006, the stock-based compensation, including the private placement, will result in a $0.67 per share reduction in our core earnings to get to GAAP earnings. And after that, for the next three quarters, it's about $0.25 a share.

If you move forward, take a look at the annual income statement impact, where for fiscal year 2006 we project that the earnings per share impact relating to stock-based compensation is $1.40 per share, approximately $1 a share for '07 and '08. And as the slide shows you, that in fiscal 2009, there would be no impact.

So again, we will be focusing on and we will ask people to focus on core earnings versus GAAP earnings, and I certainly am not saying GAAP earnings are not correct; they are correct. But the way we are required to account for the stock-based compensation, I think you also need to look at the earnings prior to that.

These charges are in expense, but the contra side of that is to equity. So they are non-cash charges. Our equity actually goes up as we amortize the cost of the stock-based compensation.

Slide 15 also gives you an indication of the unit conversions of shares net over the next three years -- net of what we forecast to be tax withholdings. We think that we will add 1,175,000 shares, as those units that were granted are converted to our common stock. So that gives you a sense, if you will, of the overhang on our stock as it relates to these stock units granted with respect to this transaction.

Finally, we will look at equity performance. And in summary, we have maintained our of-choice strategy, which states that we strive to be adviser of choice; simply, we want to be a firm where people come to us for advice, whether it be the research we provide on companies, the financing of infrastructure, school financing, corporate finance, and wealth planning -- we want to be the adviser of choice.

To do that, we can only do that through talented, entrepreneurial people. We therefore strive to be the firm of choice. I am gratified that the Legg Mason Capital Markets' associates chose us as their firm of choice as our new partners. We, in combination, will deliver as adviser of choice. And those two legs the stool are well in place going forward.

The last thing is the one that we don't talk too much about, and that is if we focus on the two core values, which is firm of choice and adviser of choice, our equity value will take care of itself. We have always maintained that, and we will continue to focus on that going forward.

It is, though, fun to end this call by being able to report to our shareholders -- and I am on the last slide of this presentation -- that for the last 5-, 4-, 3-, 2- and 1-year periods -- and we are only showing 5, 3 and 1 on this slide -- but for the last 5 year periods, our Company stock performance, just measured as changes in stock price, is the number one performing stock over 15 peer-group, if you will, companies. And you can see it on the slide and we think that that underscores our long-term business strategy.

So with that, I will at this time take questions.

(OPERATOR INSTRUCTIONS). Bill Nasgovitz with Heartland Funds.

Congratulations, Ron, to you and your team. It's been quite a success. I just had a quick -- you mentioned $27 billion in client assets. Could you give us the composition of those assets -- money market or stocks, mutual funds, equities, etc.? (multiple speakers)

I can. And the question is how quickly I can do that. But I would say -- I am signing on to our crack systems here (multiple speakers). But you know, our asset mix is generally about 60% equities and 40% bonds. The components of mutual funds, we generally break into whether it is equity or bonds in terms of that. But I would say that 60% is equity.

And in fact, if you give me a minute, I will come back and give you that answer. Did you have anything else, Bill?

No. Go ahead and move on and I will wait.

I will answer that question -- in fact I can answer -- let's see here. Yes. As of today, Bill, we have almost 28 billion -- 27.6 billion. It represents 1.4 billion in money market; common stocks are 11.4 billion; mutual funds are 5.5 billion; taxable bonds about 3 billion; tax-exempt, about 3 billion; and the rest annuities and other. Okay?

Thank you.

(OPERATOR INSTRUCTIONS). You have no further questions at this time.

Well, I guess we did a good job of explaining that. I will say that going forward, I am excited, in closing, about the prospects of our Company. I indeed think that the future is promising. We look forward to a great 2006, and I will look forward to updating you on our progress at our next call. Thank you for your time today and goodbye.

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