Stifel Financial Corp (SF) 2006 Q3 法說會逐字稿

[OPERATOR INSTRUCTIONS] At this time, I would like to welcome everyone to the Stifel Financial third quarter conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. James Zemlyak, Chief Financial Officer of Stifel Financial. You may begin your conference.

Thank you, Operator. On behalf of the company I would like to welcome everyone to our conference call to discuss the third quarter results 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 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. To supplement our financial statements presented in accordance with GAAP, we use certain non GAAP measures of financial performance and liquidity. These non GAAP measures are an addition to results prepared by the company in accordance with GAAP, and should only be considered together with the company's GAAP results. For a discussion of these risks and uncertainties, please see the business 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 of results in the company's quarterly reports on form 10-Q. With that, I would like to turn the call to over to Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Thank you, Jim. Good morning and welcome to everyone on the call. I would like to remind everyone it has been our practice for the last couple of calls that we supplement this call with slides that can be accessed at our web site, www.stifel.com. So with that, let's turn to third quarter highlights. And in short I would say this was a quarter of records for our company. Our merger with Legg Mason Capital Markets has been superb. Both integration and in terms of performance. Our private client group, which is our largest contributor of revenues and profits, had a excellent quarter. Specifically with respect to highlights, all segments, private client group, equity capital markets, and fixed income capital markets achieved both record revenue and record profitability for the quarter and 9 months ended September 30, 2006. Our third quarter revenue grew to a record $115 million which was a 76% increase over the prior year third quarter. Our 9 month revenue grew to a record $336 million, which was a 75% increase. Our combined capital markets revenue, which includes sales, trading and investment banking grew to a record $57 million. It was up 383% over the prior year third quarter. And for the 9 months, capital market revenue, a total of $155 million, which was up almost 300% over the prior year. During the quarter we continued our expansion of the private client group, opening 3 branch offices for a total of 100. We also announced an acquisition I'll discuss later in the call which further expands our private client group. At the end of the quarter, including independent contractors, the company's Investment Executives now total 680 and using core earnings, which Jim talked about as a non GAAP measure, but a measure that we think properly reflects the company's performance, our pretax margins were 15% and annualized return on average equity was 19%, and that's for the 9 months ending September of 2006. And finally, our asset management and service fees increased 27% to another record of almost $15 million. It was up 27% over the third quarter and it's up 36% for the 9 months as compared to 2005. With that I'll let Jim talk about the quarter and year-to-date results.

For this we are going to show GAAP and non GAAP. Again, for a detailed reconciliation and discussion please see the press release. Stifel reported unaudited quarterly net income of $5.4 million or $0.39 per share, a record revenue of $115 million for the quarter ended September 30, 2006. For the comparable quarter of '05, net income was $4.9 million or again $0.39 per diluted share, on revenue of $65 million. After adjusting for acquisition-related charges, principally compensation expense recorded for stock-based awards offered to key associates of the Legg Mason Capital Markets business, non GAAP net income and non GAAP earnings per diluted share for our core earnings were $9.6 million and $0.69 for the third quarter of 2006. As compared to the prior year, core earnings increased 96% for the quarter. Next slide shows us for the 9 months ended September 30 of '06 we posted net income of $8.2 million for GAAP or $0.59 per share on record revenue of $336 million, compared with $14.9 million or $1.19 per diluted share on revenue of $192 million for the same period one year earlier. After adjusting for acquisition-related charges as we previously discussed, non GAAP net income and non GAAP earnings per diluted share, or core earnings, were $27.7 million and $1.99 for the first 9 months of '06. As compared to the prior year, core earnings increased 86% for the 9 months ended. We have had several requests to include a balance sheet in our press release, which we have done, which is page 13. Let me make some comments. Total assets increased 34% to $1.1 billion, principally as a result of increased levels of firm inventory for sale to customers. Total stockholders equity increased $55.6 million or 35% to $210.7 million. The increase in equity exceeded net income due to the amortization of stock based awards and the private placement of its common stock to the key associates of Legg Mason Capital Markets business, and partially offset by the repurchase of common stock for the quarter. Ron?

Thank you Jim. I would like to just take a moment, I think talking about the balance sheet, and I thought that was a good request for people to have asked us -- I got the question of, how can you release earnings and not release the balance sheet? And thought about it and said, "That's true." So we put a balance sheet in our press release. But talking about the change in equity, the increase in equity since the end of the year far exceeds our net income, and that's a combination of primarily two factors. The first being the private placement of stock which we did, and the second being the amortization of stock based awards which we charge through the income statement, the offset going to equity. And I think that's a good segue into the impact of these acquisition costs. First of all for the year, and as you can see on the slide that is hopefully now in front of you, that for the third quarter pretax acquisition charges were approximately $7.3 million, and you can see that they're down from the second quarter as we become more efficient certainly in some of our operating expenses. We estimate for the full year that these acquisition related charges are going to total $41 million, or a $1.62 a share. And if we -- as we did last quarter and as we will do I think for the next probably 2 years, we will talk about what we see as the annual income statement impact. As I've already said, we estimate for 2006 it will be $1.62 a share and both 2007 and 2008 we see these expenses being about $1 dollar a share. Again, the majority of these items will go to increase our equity while at the same time reducing our net income which again is why we look at core earnings instead of net income as it relates to measuring the financial performance of the company. Specifically to look at two line items on a segment basis, first of all. If we look at our brokerage revenue, you will see that we'll show for private client group segments revenue it was a good quarter and you will see the 13% increase for the private client group equity capital markets and fixed income capital markets on brokerage revenue are up tenfold and five fold, which is the result off our merger with Legg Mason Capital Markets at the end of last year.. With respect to investment banking we talked on the last call about the fact that capital raising revenue for the firm was a disappointment for the first 6 months. We gave a lot of color as to why we thought that was. We also said that we thought that that trend would reverse and we see that in the third quarter. In fact our capital raising revenue in the third quarter was $10.5 million and you could see for the 9 months it's about $22.3 million. So the third quarter almost doubled the first 6 months in terms of capital raising and we see that trend continuing to improve. Investment banking on the advisory side has been very strong and as you can see, year-over-year advisory fees are up fourfold over the prior 9 months, and actually up fourfold if you will for the quarter. So the investment banking especially on the capital raising side is beginning to gain traction and that is high margin business for us and business that we expect to continue to see improvements on. With respect to segments I'll let Jim go through our segment results.

The private client group net revenue for the quarter was $56.5 million, an increase of 10% from the third quarter of '05. This is principally due to the increased commission in principal transactions and an increase in asset management and service fees. Asset management and service fees increased due to a 37% increase in the number of managed accounts and a 52% increase in the value of those assets under management in those accounts. Private client net revenue increased 3% from the second quarter of '06, private client recorded an operating contribution of $12.8 million, up slightly from the third quarter of '05, and a 9% increase from the second quarter of this year. Private client net revenue for the 9 months of '06 were $167.5 million, an increase of 14% in the same period of '05, principally due to increased commissions and principal transactions, and increased asset management and service fees, offset by a decrease in investment banking. Private client recorded an operating contribution of $36.9 million, a 4% increase from '05.

Equity capital markets recorded record net revenue of $36.7 million, an increase of 343% from the same quarter last year, principally due to increased commission and principal transactions and an increase in investment banking revenue. Investment banking fees increased principally due to a $7.4 million increase in advisory fees. ECM net revenue increased 4% from the second quarter of '06. ECM's operating contribution totaled $8.1 million, a 247% increase from third quarter of '05, and a 2% increase from the second quarter of '06. ECM recorded record net revenues of $105.8 million, an increase of 303% from last year's first nine months, principally due to increased commission and principal transaction, and increase in investment banking revenue.

Investment banking revenue increased 86% to $38.4 million, due principally to increased advisory fees of $23.2 million, offset by a decrease of the underwriting fee revenue of $5.5 million, resulting from a decreased banking calendar for lead or co-lead offerings for the first nine months. As a result of the 303% increase in net revenue and the leverage in increased production, operating contribution increased 181% to $23.6 million.

Lastly, the fixed income capital markets segment posted record net revenue of $13.8 million, an increase of 363% from the prior year third quarter, principally due to increased commission and principal transactions. Fixed income net revenue increased 30% from the previous quarter. During the 2006 third quarter, fixed income reported an operating contribution of $3.1 million, an increase of $3.2 million from the prior year third quarter, and an increase of 204% from the previous quarter in '06. Fixed income posted record net revenue of $35.9 million, an increase of 208% from the same period last year, principally due to an increase in commission and principal transactions, offset by decrease in investment banking. Investment banking revenue decreased as a result of decreased muni offerings. As a result of the 208% increase in net revenue and the leverage and production, operating contribution increased 322% to $5.9 million. Back to you, Ron.

Thanks Jim. A lot of information there. We'll end with looking at what we call other financial data. We have been through most of this. We remain very strong from a capital position, with over $210 million in equity. Book value per share of $18.39. We have already commented on our Investment Executives. The client assets under management in the private group totals $30 billion, which has been a nice increase. As we talked the last time we think, we believe that our model is in good shape in the terms of our business mix as you see. 2005, 80% of our business was private client group and 20% was capital markets. And today it's more balanced, at 46% capital markets and 54% private client group.

So before I take questions and answers, I will just say that as I have said in the press release that our third quarter begins to demonstrate, I want to say begins to demonstrate, the earnings power of our company. And while we're pleased with the results, we see tremendous opportunity to increase our market share and all of our business segments. It was a great quarter, especially by our fixed income capital markets group, I want to point out those -- that business seems to be coming out of a difficult period with the -- with interest rates, but it was a great quarter and we see continued opportunity to gain market share. So with that, Operator, I will take any questions that anyone may have.

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

Well, very good. We thank everyone for participating on our call and we look forward to reporting our full year results in early February. With that, thank you and talk to you next quarter. Bye.

This concludes the conference call. You may disconnect.