Piper Jaffray Q1 Earnings Call Transcript

123jump.com Staff
26 Apr, 2009
New York City

The middle-market investment banking firm reported net quarterly revenues from continuing operations declined 12% to $83.9 million. Net loss increased 92% to $2.7 million in the quarter. The company lost 17 cents a share compared to a loss of 9 cents a year-ago quarter.

Piper Jaffray Companies ((PJC))
Q1 2009 Earnings Call Transcript
April 15, 2009 9:00 a.m. ET

Executives

Andrew Duff – Chairman & Chief Executive Officer
Debbra Schoneman – Chief Financial Officer

Analysts

Steve Stelmach – FBR Capital Markets
David Trone – Fox-Pitt, Kelton
Daniel Harris – Goldman Sachs & Co.
Lauren Smith – Keefe, Bruyette, & Woods
Brian Hagler – Kennedy Capital Management
Tom Collins

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Companies conference call to discuss the financial results for the first quarter of 2009. During the question-and-answer session securities industry professionals may ask questions of management. The company has asked that I remind you that statements on this call that are not historical or current facts including statements about beliefs and expectations are forward-looking statements that involve inherent risks and uncertainties.

Factors that could cause actual results to differ materially from those anticipated are identified in the company’s reports on file with the SEC which are available on the company’s website at www.PiperJaffray.com and on the SEC website at www.SEC.gov. As a reminder, this call is being recorded, Wednesday, April 15, 2009. And now, I’d like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call.

Andrew Duff

Thank you and good morning. I would like to update you on the two top priorities for our firm as we navigate the near-term environment. Our first priority was to appropriately adjust our cost structure. The actions we took in 2008 and additional expense discipline in the first quarter had the intended effect. We achieved a pre-tax profit of $3.5 million for the first quarter of this year. Our revenues were 12% below the year-ago period yet we were able to generate a pre-tax profit compared to a $1.1 million pre-tax loss last year.

Our second priority is to make sure that we are well positioned to capitalize on the turmoil in the competitive landscape. We have several examples of early progress. In the first quarter we selectively added senior talent to strengthen our fixed income services, investment banking, and equity businesses. We are in active dialog with a number of potential hires that would bring experience, client relationships, and be a strong cultural fit. We are keeping a close eye on our costs and will continue to add talent judiciously.

I have remarked on our last couple of calls that I believe we have a real opportunity to gain business in the current environment. We are seeing early evidence that bears this out. First, our municipal teams are demonstrating their ability to differentiate themselves to clients and grow our business. We served as the lead manager on a $476 million issue for the City of Houston, Texas. This transaction marked our largest senior managed long term negotiated issue to date. We completed a $250 million general obligation bond offering for the City of Chandler, Arizona. This was the largest competitive issue underwritten by our firm.

As the direct result of new talent we added last year so far in 2009 we have priced over $260 million in new issues in the State of Connecticut. This is a new market for us and as a result of this increased activity we were the top underwriter of local government obligations in New England in the first quarter. Finally, we executed a $58 million issue for the University of Minnesota, marking the first time the university has used a non-New York investment bank as a lead underwriter.

On the investment banking front, we advised Lionsgate in their acquisition of TV Guide. This deal was executed by our media, entertainment and telecom team which was a new vertical we added last year. We also added new fixed income trading talent and restructured this business. Scaling back high yield and discontinuing our tender option bond program. All of these actions have led to significantly improved results.

Overall, we’re very encouraged by these early successes. Looking ahead, equity investment banking activity remains soft and we expect activity will remain so for some time. While the markets have recently trended upward they are still volatile and we remain cautious on the outlook. We anticipate that equity sales and trading will remain solid. We have confidence that our renewed focus in fixed income and trading is working. We do believe that very favorable trading environment we experienced in fixed income in the first quarter will moderate.

Now I’d like to turn the call over to Deb to review the financial results in more detail.

Debbra Schoneman

Thank you, Andrew. In the first quarter of 2009 we recorded pre-tax income of $3.5 million compared to a pre-tax loss of $1.1 million in the same quarter last year. On an after tax basis we reported a net loss from continuing operations of $2.7 million or $0.17 per diluted share. In the first quarter of last year continuing operations generated a net loss of $1.4 million or $0.09 per diluted share.

In the first quarter of 2009 we recorded tax expense of $6.3 million which moved us into a loss position. The amount of tax expense compared to the earnings was due to the distribution of results between US and non-US entities and approximately $3 million of one-time items. First quarter 2009 net revenues were $83.9 million compared to $95.7 million in the year ago period and $59.4 million for the fourth quarter of 2008.

As we anticipated, industry wide equity market conditions remained weak in the first quarter as reflected in our continued low revenues in equity financing and mergers and acquisitions. In the US just one IPO was completed industry wide. Likewise, US M&A transactions of less then $500 million for the quarter remained well below the average level of the last two years in terms of both the number and value of completed deals.

Industry backlogs continue to be very light. Industry wide there have been just 10 IPO transactions filed within the last 180 days on one of which we are co-manager. We have two announced M&A transactions. Public finance underwriting revenues improved compared to the same quarter last year and the fourth quarter of 2008.

As Andrew already mentioned, we had a number of successes with new business in the quarter which drove the increase versus the comparable quarters. A material portion of our public finance underwriting revenues have historically been driven by non-investment grade issue. This segment of the market is still not functioning well but we were able to more than offset it with business from new clients and markets. Compared to the year-ago period we reported lower revenues in taxable underwriting and public finance remarketing and auction rate securities and public finance interest rate derivatives.

For the quarter ended March 31, 2009, institutional sales and trading generated net revenues of $58.5 million, an increase of 74% from the same quarter last year and up 105% from the fourth quarter of 2008. This performance was mainly driven by strong results from fixed income in sales and trading. Equity sales and trading revenues were $30.7 million essentially flat with the year-ago period and up 9% compared to fourth quarter of 2008. Compared to both periods revenues improved in convertibles and electronic trading. We’ve refocused the convertible business to an agency-oriented model and results have improved. Performance in US equities was solid but revenues were lower compared to both periods.

Fixed income sales and trading revenues were $27.8 million, a dramatic improvement compared to $2.3 million in the same period last year and $0.4 million in the fourth quarter of 2008. The dramatic improvement was due to scaling back high yield, discontinuing our TOB program and also strong performance across municipal and technical products. We think it’s unlikely that we can replicate these very strong results going forward however.

Now I’ll turn to non-interest expenses. For the first quarter of 2009 compensation and benefits expenses were $50.3 million, down 15% compared to the first quarter of 2008 driven by lower salaries and benefits expenses. Total compensation expenses rose 3% compared to the fourth quarter of 2008. The compensation ratio for the first quarter of 2009 was 60%, an improvement from 61.9% in the first quarter of 2008 and 81.9% in the fourth quarter of 2008.

For the first quarter of 2009 non-compensation expenses were $30 million, down 20% compared to the first quarter of 2008. All expense categories showed a significant decline or were essentially at the same level compared to the year-ago period. The improvement was primarily due to the actions we implemented in 2008.

In addition, business activity was low and we exercised even stricter cost discipline in the first quarter. We continue to try to reduce costs. That said, we still believe that a quarterly run rate closer to $35 million is more realistic going forward in 2009 as business activity increases.

In summary, we have successfully reduced our cost structure with the near term market realities of depressed equity investment banking. That concludes our formal remarks and now Andrew and I will answer your questions.

Andrew Duff

Operator, we are ready for questions, if you would queue them please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to register a question, please press the “1” followed by the “4” on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the “1” followed by the “3”. If you are using a speakerphone, please lift up your handset before registering your request. And our first question comes from the line of Steve Stelmach with FBR Capital. Please proceed with your question.

Steve Stelmach – FBR Capital Markets

Hi, good morning, guys.

Andrew Duff

Good morning, Steve.

Steve Stelmach – FBR Capital Markets

Congratulations on a pretty decent quarter getting in pretty a tough environment. With regard to the reduction in the high yield how should we be thinking about that? Is that a reduction in terms of staffing, capacity, or is it less capital being committed on the desk? What did you do to reduce that exposure?

Debbra Schoneman

Yes, I would say it’s a little bit of a combination of a couple things. One is it is reduced capital associated with that. And then really changing the emphasis of where the staffing does spend their time and where their emphasis is placed. For example, there are taxable municipal products which has been increasing in the marketplace and so it is really shifting those resources to where we feel it’s more tied in with our core municipal business and other project finance businesses.

Steve Stelmach – FBR Capital Markets

Okay. All right, that makes sense. And then Andrew, on the media side, I sort of hit on this every quarter but it sounds like there is always a pipeline developing and it seems like you got some of that in this first quarter. Would you characterize the first quarter as seeing the benefits of that pipeline or is it simply just you’re doing business in more places?

Andrew Duff

It’s really a combination, Steve. On the one hand, a significant amount of our business historically looking back over years has been lower grade and/or non-rated non-investment grade. In that part of the marketplace it’s still essentially frozen, there’s very little activity as the thaw continues. Having said that, what you saw is our ability to fully make up for that and grow the business by the expansion we’ve taken in essentially new areas and new geographies.

Steve Stelmach – FBR Capital Markets

Okay. So, if we think about the volume of deals in the first quarter is that pretty indicative of what you expect for the balance? I’m talking industry wide here not necessarily Piper specifically but industry wide. Is that what you would expect for the balance of the year or do you still expect things to improve from here?

Andrew Duff

I think they can improve over time. Again, what we saw last fall, let’s say November, December, was almost a complete freeze in the municipal markets as well. And then at the turn of the year very high grade could access the market AAA, AA. We’ve now done things even as BBB charter schools BBB minus I think it was actually and successfully got that done in the marketplace. As that continues over time I think you can see even higher volumes. Also, the marketplace is largely digested the significant restructuring of the auction rate securities, not all of it but a large part of that is actually now done.

Steve Stelmach – FBR Capital Markets

Okay and then the last question. I apologize if had hit on in your prepared remarks and I missed it. So, the income tax expense, could you just explain, it seems a little high here.

Debbra Schoneman

Okay. There are a couple of things going on there so let me address each of them. If you look at two components, one was the income tax on the income for the quarter and what we saw there was an income in the US so we had positive income in the US and we had losses in our non-US entities. We have a couple of situations going on there, one you have a higher tax rate in the US versus in some cases of lower tax rates internationally. But then specifically in the UK we recorded a valuation allowance of 100% of our deferred tax asset at the end of last year so in essence we wrote off our deferred tax asset. The impact of that is that we now in the current environment cannot recognize any tax benefit from the operating losses coming from the UK. And so that combination of the distribution of results between US and non-US has caused part of that.

The other piece was about $3 million of really one-time items that were unrelated to the income for the quarter. Just give you an example. There are a number of things in there but an example of one would be tax law change in the State of California required us to make adjustments between our tax expense and our deferred tax assets.

Steve Stelmach – FBR Capital Markets

Got it. Okay and then, so, is it fair to say that that $3 million is not going to come back in future quarters, those are adjusted one timers, right?

Debbra Schoneman

Yes, it is something that is not specific to the earnings for the quarter and there could be situations in the future where you have to make adjustments to deferred tax assets but I think what you stated is correct.

Steve Stelmach – FBR Capital Markets

Perfect. Okay. Thank you very much.

Operator

Ladies and gentlemen, as a reminder to register for a question, please press the “1” followed by the “4”. And our next question comes from the line of David Trone with Fox-Pitt. Please proceed with your question.

David Trone – Fox-Pitt, Kelton

My question was just answered on the tax side. I guess while I am queued here, any thoughts on, maybe you’ve already commented but staffing, I know you’re obviously, do you have a strict hiring freeze or maybe if some opportunities arise for the right people in the right spots are you still potentially willing to bring on some folks that might be coming from the bulge bracket?

Andrew Duff

David, it’s really a lot like where we were towards the end of last year. We went through several rounds of downsizing at the first part of the year just to get ourselves into the right position. And now it’s a balance of adding and the additions would typically be quite senior, principal MD, experienced client relationships that fits in one of our verticals where we haven’t fully covered some part of the marketplace.

But I would also add that we still are looking at ways to make sure we’re as efficient and effective as possible and we did have some downsizing during this quarter even abroad. So we’re continuing to balance. I would expect that you might see modest headcount growth between now and the end of the year but really truly modest and very selective.

David Trone – Fox-Pitt, Kelton

Okay, great. Thank you very much.

Operator

And our next question comes from the line of Daniel Harris with Goldman Sachs. Please proceed with your question.

Daniel Harris – Goldman Sachs & Co.

Hey, good morning, guys. How are you?

Andrew Duff

Good morning.

Debbra Schoneman

Good morning.

Daniel Harris – Goldman Sachs & Co.

I was wondering if you can go back to some of the comments you made on the fixed income business specifically around your view that second quarter or maybe the next few quarters wouldn’t be quite as positive as we saw in the first quarter. Is that reflective of spreads or activity in certain areas that we should be focused on as we think about that?

Debbra Schoneman

Yes, I think if you look at that business as a couple of different components, there’s our municipal business and taxable middle market sales which are significant pieces of that business which we do believe will remain solid going forward. I think exactly what you said; we could see some volatility and fluctuation given where credit spread may move on our taxable business.

Daniel Harris – Goldman Sachs & Co.

Okay. So it’s really -- I am sorry, go ahead.

Debbra Schoneman

The thing I was going to add is that really where that may impact us is in our aircraft business for example and that’s an area that we have been deemphasizing as we mentioned, reducing capital exposure in that area.

Daniel Harris – Goldman Sachs & Co.

Do you guys do much in the way of investment grade trading even on the agency side? And then secondly to that is, are you participating much in all of the issuance going on for the financial firms in terms of secondary trading?

Andrew Duff

As to the agency market we’re actually very active in that, our middle market taxable sales has been very active in that area. Less so in the new issue investment grade, we’re not a big participant in that.

Daniel Harris – Goldman Sachs & Co.

Okay. And then looking over at the equity trading side obviously volume has been very good but I think most indications are that fundamental equity trading is lower. Are you seeing a shift of market share to firms like Piper from firms that either aren’t as active before or people just want to spread their commission dollars around more than they used to?

Andrew Duff

We’re seeing early signs of that. I think it’s premature to come to a significant conclusion. But just like I think we’ve spoken to on previous calls we’ve taken a very detailed look at the competitive landscape and what potential share might be available in areas where we’re focused both on an investment banking public finance basis as well as institutional investors and we do see early signs of that, that some of the consolidation that’s gone on in the industry is not being captured by the new combination but in fact they’re spreading that business out and we think we can capture some of that. There are early signs of that. The measures aren’t totally solid. We’re relying on AutEx at this point. It tends to lag by at least 90 or 120 days and has fewer and fewer participants. Really AutEx and the early indications to your question are yes.

Daniel Harris – Goldman Sachs & Co.

Okay. And then shifting over to banking I know you guys have talked about adding a couple of people in restructuring over the last year or so. Have you added any more people in the first quarter and are you actively engaged in any assignments at this point?

Andrew Duff

We have not added anything additionally in the quarter and I believe we have just a couple of assignments and we’re really viewing that as directly connected to our industry verticals not a broad restructuring practice across the US economy and autos or what have you but tied much more closely to our industry verticals, consumer, etc. where there will be activity.

Daniel Harris – Goldman Sachs & Co.

And then just two numbered questions for Deb. One, when you strip out all the noise on the tax rate, is something like a 28% rate the number we should be thinking about going forward? And then on the non-comp, I think you guys had talked about a target of something around $35 million but is $30 million where we think you guys should be able to hold that?

Debbra Schoneman

First on the tax rate side, I think you should think of a number a little closer to the mid-30s for the US tax rate. Again, the international components as we just mentioned to the extent that those results are going to skew it based on my comments on the tax question answered earlier.

And then on the non-comps side, I think at this point we still believe a number closer to $35 million is more realistic as certain costs such as travel and entertainment were low in the quarter. We continue to work on cost savings obviously as we move forward, it’s just that some of these expense categories are dependent on business activity, and so we view something closer to $35 million as more realistic.

Daniel Harris – Goldman Sachs & Co.

Okay. Thanks very much.

Operator

Our next question comes from the line of Lauren Smith with KBW. Please proceed with your question.

Lauren Smith – Keefe, Bruyette, & Woods

Hi. Good morning.

Andrew Duff

Good morning, Lauren.

Lauren Smith – Keefe, Bruyette, & Woods

Just a quick one on Samco, AUM continues to decline Q on Q, was it again pretty much a function of market depreciation or how are the flow trends looking like the past couple of months?

Andrew Duff

They’re really relatively flat, they offset each other quite closely, Lauren, it’s almost exclusively market.

Lauren Smith – Keefe, Bruyette, & Woods

Okay. That’s great. And just a quick one. In your comments you mentioned Connecticut being a new market for Piper. I’m just curious is that how did you enter that market, was it just hiring people, was it you got into California and the higher education through picking up some folks out of UBS, I was just curious the new entry into Connecticut is a function of something similar?

Andrew Duff

It is Lauren and historically the bulk of our franchise had really been, if you’d call it a Western half of the United States. We do have some people in New York now as well as Boston and opened an office in Hartford. So we’re beginning to build a presence and I think that can be self-fulfilling over time as we start to get share. I think more share becomes available and we have more people approaching us for whatever reason thinking about leaving where they are and our visibility in the marketplace is helping us with that. So yes, the Connecticut really came from opening a small office in Hartford and having someone join us.

Lauren Smith – Keefe, Bruyette, & Woods

Okay. So, New England at least from your public finance business we should think about as a growth opportunity for you guys?

Andrew Duff

We believe so. Absolutely.

Lauren Smith – Keefe, Bruyette, & Woods

Perfect. Thanks so much.

Andrew Duff

Thank you.

Operator

And our next question comes from the line of Brian Hagler with Kennedy Capital. Please proceed with your question.

Brian Hagler – Kennedy Capital Management

Hey, good morning.

Andrew Duff

Good morning.

Debbra Schoneman

Good morning.

Brian Hagler – Kennedy Capital Management

Most of my questions have been addressed but just to go back to the tax rate one more time, you mentioned the 35% in the US and then the non-US will lead to some volatility around that. What’s your best guess of a combined tax rate the rest of the year?

Debbra Schoneman

No, that is really not a number that I can come up with because it very dependent on the distribution of the results between the US and the international non-US entities.

Brian Hagler – Kennedy Capital Management

Okay and then just back to the prior question real quick. You entered California; Connecticut, sounds like you may have also recently opened offices in Boston, New York. Can you talk about other geographies or territories you’ve either entered or are looking to potentially enter?

Andrew Duff

It’s really a combination. So you covered a lot of the areas that we’re growing; New England would be a very significant opportunity over time. Additionally, the example I gave with Houston which was actually a water and sewer issue is the other opportunity which is market share. That’s an account that had been led managed by one of the companies going through a merger transition and we had long been a co-manager and created an opportunity to become the senior manager. So we’re seeing both those opportunities not only new areas and new geographies but moving up cap and going from a modest co-manager to the senior manager on close to a $500 million issue.

Brian Hagler – Kennedy Capital Management

Great. Okay. I think that’s it from me. Thanks.

Operator

As a reminder, to register a question, please press the “1” followed by the “4”. And our next question comes from the line of Tom Collins. Please proceed with your question.

Tom Collins

Hello. Congratulations on a nice quarter. I had one question that goes back to your 10-K, you indicated that you had a reimbursement guarantee and your exposure there was $88 million mitigated by some underlying bonds which had a market value of $84.6 million at the time. As of March 31st, has that exposure changed? And is there a P&L related to that?

Debbra Schoneman

Yes, so this is related to our tender option bond portfolio which we have sold substantially to discontinue that business. So there hasn’t been any P&L impact that that exposure has been reduced.

Tom Collins

So, is there still an exposure of $3.4 million and was that $3.4 million recognized in the quarter ending 12/31 or it’s just an exposure and not accounted for as P&L?

Debbra Schoneman

The $3.4 million you’re referring to?

Tom Collins

This is in your 10-K, the reimbursement guarantee and the difference between --

Debbra Schoneman

Okay. Yes, the differential. Ultimately that program has been, as I mentioned, discontinued. We ultimately had sold the municipal bonds associated with that. We do have two, what are called total return swaps which still are under that reimbursement guarantee, in that case we do not have any exposure from the underlying collateral perspective and those are both transactions that we are also attempting to liquidate. Based on the structure those transactions there isn’t actually market exposure on those.

Tom Collins

Okay. Thank you. One other question. In your 10-K you referred to concentration of credit risk and you said you had some six counterparties totaling $42.4 million and it was unsecured type of arrangements, I guess the mark-to-market. Is that something that gets where the collateral changes hands on a quarterly basis so that exposure gets reduced or is that something that continues outstanding for the life of the contract?

Debbra Schoneman

From a market perspective those are hedged but you’re exactly right it relates to underlying collateral. On those particular interest rate swaps we do not have an agreement whereby we receive collateral from those counterparties which is very typical in municipal interest rate derivatives business when you’re dealing with the issuers. So that is something that is going to continue for the length of those contracts. The exposure has been reduced in the first quarter due to market movement and we do believe that all of those credits are very solid credit.

Tom Collins

Thank you.

Operator

And we have no further question at this time. I will turn the call back to you.

Andrew Duff

Thank you for joining us this morning and we look forward to updating you after the second quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.