Stifel Financial Corp (SF) 2006 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Financial first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Mr. Zemlyak, you may begin your conference.

Thank you, operator. Good morning, everyone. This is Jim Zemlyak, 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 first quarter of our 2006 fiscal year. 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 and 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 reports on form 10-q. With that, I would like to turn the call over to the Chairman, CEO and President of Stifel Financial, Mr. Ron Kruszewski.

Thank you, Jim. Good morning to everyone. I first of all would like to tell everyone that we do have slides that accompany this call. The slides can be accessed on our website, stifel.com. Or also on some of the various services that provide these calls. First of all, I'm very excited to be speaking to you this morning for the first quarter. I refer to Stifel Nicolaus, even though it was founded in 1890 being some 116 years old, that 2006 marks the beginning of a new Stifel, which is a firm that is extremely well positioned to serve our clients across a number of markets, not only private client, but also the capital markets business, both equity and fixed income. We will talk a fair amount this morning about some of the interesting accounting issues that we've talked to you in the past about as it relates to our acquisition. But in short order, I will tell you that I'm very pleased with the first quarter performance. The integration of people and technology has been seamless, extremely smooth, and beyond certainly my expectations.

The first quarter review is the first quarter which incorporates the former Legg Mason Capital Markets business into Stifel Nicolaus and the accounting for the private placement that occurred in January, which created an unusual item in terms of expense. We have to talk about the accounting of stock based compensation. And then of course, as all firms have had, we had a positive gain from the mark to market, if you will, of our New York Stock Exchange seat, which added positively to the quarter. But at this point, I'll turn it back over to Jim to go over the quarterly results. We're on slide 4 has the first quarter financial results and you will see that we're going to talk both about core earnings and GAAP earnings. And with that, Jim.

Thanks, Ron. Today we reported unaudited quarterly core earnings of 11.1 million or $0.83 per diluted share on record net revenues of 109.5 million for the quarter. As more fully described -- as I'll describe later, core earnings is a non-GAAP measure. Including acquisition related charges, the Company's GAAP net income for the quarter was 476,000 or $0.04 per diluted share. For the comparable quarter of '05, net income was 4.4 million or $0.35 per diluted share on net revenues of 60.2 million. The Company achieved record net revenues as a result of the benefits attributable to the Legg Mason Capital Markets acquisition, which closed on December 1, 2005. I'll describe the core earnings. As a result of the acquisition of Legg Mason's Capital Markets business, Stifel will begin reporting core earnings. It's a non-GAAP measure. Core earnings represent GAAP net income before acquisition-related charges, principally compensation expense recorded for stock-based awards offered to key associates of the Legg Mason Capital Markets group and accounted for under statement of accounting standards 123.

We believe core earnings provides investors, rating agencies, and financial analysts with a more meaningful measure of the Company's operating performance. As previously stated, core earnings for the quarter ended March 31, 2006 were 11.1 million or $0.83 per diluted share. Included in core earnings is $0.16 diluted share for the gain on the Company's New York Stock Exchange membership seat. Core earnings excludes acquisition charges of approximately 17.8 million or $0.79 per diluted share. Included in these acquisition-related charges are a compensation charge of approximately 9.8 million for the difference between the $25 per share offering price and the grant fair value price of 34.27 per share for the private placement of the common stock to key associates of the capital markets business. Secondly, compensation charges of 7.7 million for amortization of units awarded to the capital markets associates severance and contractually based compensation above standard based compensation for the quarter. And finally, other non-compensation charges of 300,000. I'll turn the call back over to Ron.

Thanks, Jim. What I want to talk about is, again, first of all, for the quarter revenues up 85%. Total revenues of almost $114 million will give you a sense as to the new revenue base with which we have to drive shareholder value. The capabilities and the productivity of the firm are significantly increased. And so certainly the first measure of the success of our integration is based on -- or is -- can be seen in the revenue numbers. As Jim said, the thing that needs a little bit more discussion, or the item that needs a little bit more discussion, is the difference between how we look at the, what I believe is the earnings power of the Company, which we define as core earnings, which was $0.83, versus the GAAP net income of $0.04. And that difference is principally attributable, almost all attributable to the amortization of the stock which we awarded to the Legg Mason associates. As I've said on previous calls and the last couple of calls, for the most part because a lot of the consideration went to our new partners instead of the seller, we're required to charge that to expense.

So if you look on the slide that's in front of you right now, you will see that there were three items totaling $17.8 million or $0.79 a share related to these items in Q1. Importantly, the private placement expense of $9.8 million was a one-time item, if you will, as it relates to the private placement. We don't anticipate doing that every quarter. And as you can see here, we do not project that there will be any expense related to that. So the 17.8 million that we recorded in the first quarter, we believe will be reduced to $7.5 million in Q2 through Q4. And if you move forward to the next slide, I think it will become clear again as to why we're going to look at core earnings as a measure, because in fiscal year 2006, we project that we'll have about $39 million of this merger acquisition, primarily stock-based compensation, that will run through the income statement. In fiscal '07 it will be 25 million, same in fiscal '08, and then '09, there are these charges disappear.

And so in effect a difference between core income and GAAP income will go away beginning in '09. But we believe that you need to look at core income to truly understand the cash earnings power of the Company. The next slide looks at the components of revenue for the quarter. And with that, I'll turn this back to Jim.

Ron, again, we had record net revenues for the first quarter, which increased 82%, to 109.5 million from 60.2 million in the prior year first quarter, and 45% from the fourth quarter of '05. Commissions and principal transaction revenue increased 98% to 69.8 million from 35.3 million from the same period last year, and increased 55% from the fourth period of 2005. Investment banking revenues increased 14% to 15.7 million in the first quarter compared to 13.7 million in the prior year, and increased 6% from the fourth quarter of '05. Asset management and service fees increased 43% to 13.5 million from 9.5 million in the first quarter of '05, and increased 9% from the fourth quarter of last year. Net interest increased 34% to 3.1 million from 2.3 million in the prior year first quarter, but decreased 2% from the fourth quarter of '05. Other revenues increased 8 million to 7.4 million in the first quarter, primarily due to the gain in the New York Stock Exchange member seat and increased 7.1 million from the fourth quarter of '05. We'll turn over to the next slide where we'll talk about the detailed expense items and Ron will take over that review.

Right. If you look at the next slide, you'll see that we look at core earnings and then we do reconcile down to GAAP earnings. Our core earnings of $11.1 million represents a 10% after tax margin. The pretax margins are very acceptable for us at 17%. Of course that does include the New York Stock Exchange seat. If you exclude that, our pretax margins are in the mid-14%, so those margins are acceptable. The returns on equity, annualize all of those numbers, are exactly -- not exactly, but well within the range of what we hoped for when we put these two companies together. So, again, the businesses have fit together very nicely and the numbers are reflecting that. If we look at the segment review, Jim, if you would just walk us through quickly the segments.

We'll quickly go through the net revenues by segment, [press] and contributions. Private client group net revenues for the quarter, first quarter of '06 were 55.7 million, an increase of 18%, with strong performance for private client group from the first quarter of '05. Private client group recorded an operating contribution of 12.9 million, a 15% increase from the first quarter of '05. Equity capital markets recorded a record net revenue of 33.8 million, a 292% increase from the same quarter last year. And an operating contribution totaled 7.1 million, or a 160% increase from the prior year first quarter. Fixed income capital markets, again, they posted a record net revenues of 11.9 million, an increase of 190% from the prior year first quarter.

During '06, fixed income capital markets recorded an operating contribution of 1.7 million, an increase of 209% from the prior year first quarter. And lastly, in our other segment, we posted net revenues of 8.2 million, which included the previously discussed gain on New York Stock Exchange membership seat during the first quarter. Other operating segment recorded an operating loss of 20.9, which included acquisition-related charges, primarily the stock-based compensation as Ron and I have previously discussed.

Thank you, Jim. The last slide just reviews some other financial data, total assets, because of our increase in the fixed income capital markets, our assets have increased from 400 million to about $900 million, but that's long inventories. On the liability side we hedge a lot of those positions and so we're short, but it is spanning the balance sheet. Stockholders equity deserves one quick comment, that it's nearly $200 million at 196 million. This sort of underscores what's going on. Even though our GAAP net income was only $400,000, our equity increased from 155 million to 196 million, and that is two factors. The first factor is we did complete a private placement that raised to the equity books about 30 -- 31 million net after we had to do some tax withholding, but the remainder of that increase is because the offset to these stock-based compensation charges that we've been talking about, they are non-cash the credit, if you will, goes to equities. So our equity account grows significantly, even though net income doesn't show it. And you'll continue to see that.

Our equity accounts will, in fact, grow more inline with core earnings than with GAAP evenings, which is sort of why we're looking at core earnings, just to try to explain it as easily as we can. We've seen some nice -- we've got a full recruiting pipeline, which sort of put us on the map in the east and the southeast with transaction. We've opened a fair amount of offices since the first of the year. We've managed almost 29 billion in client assets. Net net, this is an exciting time for us. We believe that this transaction at this point is integrated. Everyone is working very well together and this Company is positioned for significant growth. And as I say in the press release, we think we can continue our historical growth, albeit just from a higher plateau today. So with that, operator, I will take any questions that anyone may have.

[OPERATOR INSTRUCTIONS] At this time, there are no questions.

Very good. Well, thank you, operator, and thank everyone for attending the call today. We look forward to talking to you again in the summer with our second quarter results. Good-bye.

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