Q3 2019 Earnings Call
Good morning, and welcome to be Piper Jaffrey companies conference call to discuss the financial results for the third quarter of 2019.
During the question 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 could differ materially from those anticipated are in the Companys earnings release and reports on file with the S. E C, which are available on the company's website at Www Dot Piper Jaffrey Dot com and on the S. E C website at www.
<unk> Dot S E C dot Gov.
This call will also include statements regarding certain non-GAAP financial measures.
The non-GAAP measures it should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with gap.
Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure.
The earnings release is available on the Investor Relations page of the company's website or at the S. E C website.
As a reminder, this call is being recorded.
And now I'd like to turn the call.
Over to Mr. chat Abraham Mr. Abraham that you may begin your call.
Good morning, everyone I'm here with that's showing them in our president and Tim Carter our CFO .
We would like to thank you for joining the call to discuss Piper Jaffray financial results for the third quarter of 2019.
After our remarks, we will open up the call for questions.
Let me begin by providing an update on the strategic activities, we announced earlier this year.
In early August we closed on the acquisition of when a company, which significantly upgrades our equity trading capabilities broadens our client base enhances the scale of our equity sales and trading business.
Let me provide more color on the integration and early financial results for the combined platform.
In late September we closed on the sale of advisory research, our traditional asset management business. This business no longer fit with our strategic vision and we believe a sale was the best first of action for our clients employees and shareholders.
The sale generates net cash proceeds of approximately 55 million.
Jim will provide more details regarding the gain on sale recognize with the disposition.
Finally early in the third quarter, we announced our pending acquisition of Sandler O'neill.
Excited to bring together the leading investment banking firm focused on the financial services industry with our growing investment banking platform.
We believe that the combination will be transformative across our businesses as it will elevate our advisory and capital raising franchise within the middle market at a differentiated fixed income business with deep client relationships and capabilities and expand our equity research coverage to the broadest fig platform on the street.
Sam was 2019 results are tracking to our expectations for the year and given the current market conditions, we remain comfortable with our estimate of approximately 300 million of incremental annual revenues from Sandler.
We have signed employment agreements in place, including with all employee partners.
Our integration and regulatory approval efforts are in process and earlier. This month, we closed on a 175 million in debt to finance a portion of the cash consideration.
We're excited to partner with Sandler a market leader that shares our client centric approach, leading with deep sector industry expertise.
Jim will provide additional information relating to the acquisition of Sweden, the disposition of IRI and the Sandler acquisition, which is expected to close in January 2020.
Let me next provide an update on our Q3 and year to date result, and our advisory and equity capital markets businesses.
We generated 203 million of adjusted revenues in Q3 up 24% from a softer Q2 and flat to last year.
We generated a 16% adjusted margin for the quarter and recorded adjusted EPS of $1.64.
On a year to date basis, our adjusted revenues of 547 million are up 5% from last year and adjusted pre tax income is up 15%.
We expect to finished the year strong based on our solid pipeline.
Turning now to advisory any CF.
Advisory revenues of 107 million in the quarter were down slightly from the strong year ago period.
The current quarter was led by our industrials team followed closely by our consumer team. Both teams continue to grow organically by expanding their reach within their respective sectors. The diversity of our platform is exhibited by the strength of different sectors, leading each quarter Q1 was led by our industry, leading health care franchise.
Q2 was led by our Semmens energy team and as noted this quarter buyer industrials team.
Reflecting continued momentum year to date advisory revenues of 297 million are up 12% from the prior year and represent 54% of total adjusted revenues.
Our execution on on organic growth initiatives and our diverse banking platform has allowed us to increase our market share relative to industry metrics that are generally down year over year.
Our advisory business has also benefited from an increase in median fee up 16% from year ago.
We've had a strategic focus on increasing our revenues per deal as we leverage our brand twin larger deals and by enhancing our value proposition to clients by providing more products and deep sector expertise.
We're consistently winning in a competitive marketplace.
Market conditions for M&A in the middle market remain conducive to transactions due to demand from PE investors attractive valuations low financing rates and solid economic growth.
Our pipeline is strong across our industry verticals, including several larger deals, which we believe will set us up well for a strong finish to the year.
Equity financing activity generated 22 million of revenues in the quarter market has been negatively impacted by volatility and weak aftermarket performance of some high profile Ipos we.
We believe that relative to the strength of our overall IB franchise, we're underpenetrated in DCM and can grow our market share in the future.
I will now turn the call over to Deb to discuss our public finance and brokerage businesses.
Thanks, Chad, let me begin with an update on our equity brokerage business.
The third quarter saw equity market volatility, but continued to move higher despite global growth concerns and trade tensions.
Our equity brokerage business generated revenues of 25 million meaningfully compared to both of the prior period driven by two months of weed and on our platform.
The acquisition, we hadn't closed on August 2nd and we have fully integrated our systems and back office operations.
The combined platform serves approximately 1600 accounts, a 30% increasing coverage, which gives us the opportunity to cross sell products across this expanded client base.
On a substantial increase in our combined trading volume allows us to provide greater liquidity to our clients.
Our increased trading capabilities combined with a broad suite of products and deep sector expertise increases our market relevance and makes us more valuable to both corporate and buy side clients.
In addition, we continued to strategically invest in differentiated research and during the quarter announce. The addition of two top ranked senior tech analysts focusing on software.
On an annual basis inclusive of Sandler we expect equity brokerage revenues to be an excess of 130 million, providing meaningful operating leverage in the business as we capitalize on cost synergies.
We believe that we have a significant market share opportunity in front of that driven by a high quality team collaborating to bring the full breadth of products and from resources to an expanded client base.
Turning to our public finance and fixed income brokerage businesses, we generated 23 million of debt financing revenue in the quarter, 26% from Q2 and 10% from year ago.
Year to date municipal market underwriting volumes are up approximately 8% from last year benefiting from lower interest rates.
Our year to date revenues have increased 19%, reflecting strong relative performance as we capitalize on the strength and breadth of our franchise.
We expect our debt financing revenues to continue to increase driven by taxable refinancing activity and as we execute on some of our larger fee offerings in our specialty sectors.
Demand is strong for higher yield muni offerings in this low interest rate environment, and our specialization and senior living and project Finance should drive a strong Q4.
Our commitment and expertise in the public finance market has led to increasing market share overtime and makes us a natural destination for talent looking to best serve their clients.
We are one of the most active municipal debt underwriters in the market ranking in the top 10 based on par value and top three based on volume of deals.
I keep tenet of our growth strategy is to expand the number of states in which we are market leader.
Consistent with that strategy, we announced the hiring of four senior bankers and Nebraska, adding another state where we are the market leader in total we have hired nine senior bankers this year, expanding our presence in Nebraska, Colorado, Pennsylvania and Ohio.
In the fixed income markets yields were volatile during the quarter with the tenure treasury at 2% on June Thirtyth.
I think due under 1.5% before ending the quarter at 1.7% as investors worry about slowing growth.
Against this backdrop, we performed well with fixed income brokerage revenues of 26 million up 28% sequentially and 42% over the year ago period.
Results were driven by strong demand for taxable products as investors look to take advantage of yields with an outlook for further decline in rates.
The breadth of our product offering and focus on discrete client verticals allowed us to capture this client volume.
We expect fixed income sales and trading results to moderate from these strong third quarter results.
Now I will turn the call over to Tim to review, our financial results and provide an update on capital use.
Thanks.
My comments will be focused on our adjusted non-GAAP financial results. However, let me first highlight a few items impacting our GAAP results.
Our GAAP results include amounts related to the discontinued operations of our traditional asset management business.
The quarter, we recorded net income from discontinued operations of 26.1 million or one dollar and 82 cents per diluted common share which includes a gain on sale its advisory research.
In addition, we incurred 6.1 billion of restructuring and integration costs in Q3 related to the acquisition of we and the pending acquisition of Sandler.
These costs consist of severance benefits lease restructuring charges and transaction related professional fees.
We expect to incur additional restructuring and integration costs in the fourth quarter and in the first half of 2020 associated with these acquisitions.
Turning now to our adjusted financial results revenues of 203 million in the quarter were consistent on a year over year basis as lower equity financing revenues were offset by higher institutional brokerage revenues as Deb discussed. Our Q3 results include two months of revenue for we.
Compared to the sequential quarter revenues were up 24% with broad based contributions across most of our businesses.
We produced an operating margin of 16% for the quarter and generated operating profits of 32 million.
Our diluted EPS for the quarter of one dollar and 64 cents. This down six cents per share on a year over year basis, and up 32 cents per share sequentially.
On a year to date basis EPS of $4.47 increased from $3.83 in 2018, driven by higher revenues and a higher operating margin.
On a year to date basis pre tax income was up 15% on a 5% growth in revenues illustrating the operating leverage in the business.
Expense discipline has been an important source of leverage for us and as we continue to scale. The business, we expect our non comp ratio to decline generating additional margin.
In regards to operating expenses, our compensation ratio of 62.1% for the quarter was at the low end of our target range of 62% to 63%.
Quarterly non compensation expenses were 44 million below our estimate of 45 to 47 million for the third quarter, which reflected two months of incremental expenses from we.
Our adjusted tax rate for the quarter was 27% we continue to maintain our full year estimated tax rate range of 25% to 27%, which excludes the impact of stock Vestings.
Turning to capital our pending acquisition of Sandler will allow us to deploy excess capital, including the cash proceeds from the sale of a ROI.
Tober, we raised 175 million of cash with the private debt issuance to pimco at a blended rate of 5% to finance a portion of the acquisition consideration.
The debt has 50 million of notes maturing in two years and 125 million of notes maturing in four years.
With no long term debt on the balance sheet before this capital raise our leverage remains modest.
The Sandler acquisition reflects the financial strength of our balance sheet and the level of cash generation from our earnings. We expect the addition of Sandler will further increase our generation of excess capital, which we can redeploy towards more growth opportunities, while maintaining our dividend policy of returning 30% to 50% of non-GAAP earnings to shareholders and continued.
And to be opportunistic in buying back stock.
On a year to date basis, we've returned an aggregate of 30 million or $2.14 per share dish to our shareholders through dividends.
This includes the annual special cash dividends of one dollar and one cent per share that was paid out in the first quarter.
In addition, today, we declared a quarterly dividend of 37, and a half cents per share to be paid on December 13th 2019 to shareholders of record as of the close of business on November 22nd 2019.
Let me finish up by providing some high level future guidance as we've made a number of strategic shifts in our business model providing guidance in a cyclical business like ours is difficult. However, given the change in our business mix, we thought it would be prudent to provide additional insights into our go forward operations.
For 2020 Sandler is expected to add approximately 300 million of total revenues. We will also benefit of we wouldn't be in on our platform for the full year based on our current outlook inclusive of Weedon and Sandler we expect the equity brokerage business to be $130 million business.
Going forward, we expect our compensation ratio to be consistent with current levels in the range of 62% to 63%.
Removing asset management from our business mix, which had a lower compensation ratio offsets the benefit from adding the lower comp ratio of weedon.
This level also allows us the financial flexibility to continue investing in the business.
We expect that non comps will increase in Q4 from the Q3 levels, reflecting a full quarter of weed and expenses.
We currently estimate Noncompensation expenses in 2020 to be in the range of 58 to 62 million per quarter, reflecting a full year of Sandler and weedon.
We will update our non comp guidance in 2020, after we have greater visibility into the Sandler integration.
Non comps may vary from period to period dependent on the amount of deal related expenses, which will be principally dependence on the level of deal activity.
Before going to today I'd like to turn the call back to chat for a few additional comments.
Thanks, Tim on behalf of my employee partners, we have never been more excited about our future building enduring franchises remains the cornerstone of our from the addition of leading then sandler to market leaders will enhance the durability and scale of our business through market cycles with complimentary products experts.
Okay, and client relationships Sandler and weedon, both present meaningful opportunities to grow our combined platform and will significantly strengthen our position in the marketplace.
Thanks, and now let's open up the call for questions.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
He would like to withdraw your question press the pound key.
We'll pause for just a moment to compile the glenday roster.
Your first question comes from the line of Devin Ryan of JMP Securities.
Great Good morning, everyone.
Evan.
First question here just around the Sandler transaction curious now that were a few months.
From the announcement, whether theres been any feedback from financial sponsors just given your.
Strong relationships, there and kind of what they're saying and how you're thinking about maybe that opportunity today to do more with that customer base.
In April sector, and just maybe more broadly just an update around how you're thinking about potential revenue synergies here given that it doesn't sound like.
You are assuming anything in the.
Guidance commentary made.
Yes, Thanks, Devin maybe I'll just take that.
In a couple of parts I mean, I think frankly, since we announced the.
Transaction in July the feedback has been.
Fantastic, probably even more than I expected just the high quality of the brand and the bankers and the producers at at Sandler I mean, I think thats very recognized.
So I do think where we're excited because we have a bigger sponsor group, we have a bigger sponsor business and I do think.
While certain parts of their business, particularly depositories are not heavily sponsor driven theres other parts relative to the insurance business financial technologies, and others, where we do think just being part of a bigger sponsor platform.
He is going to be a great.
Synergy and then I think just relative to other opportunities. We just can't wait to get started in January we certainly have seen just relationships of various board members sorta, both ways with potential future transactions and we're excited about that and then.
Specifically with regard to fixed income.
Think we knew there was going to be an opportunity.
To grow.
And more than one plus one is too in that case in fixed income, but I think where frankly, even more excited.
As we've started to think about ways, we can work together on.
Transactions and just regular business with clients.
Appreciate that Chad So I guess.
Takeaway is that there's potentially more to come here, but too early to get specific around the numbers to include.
In guidance or do you have any sense of when some of this might start to show through and manifested results.
I mean will that we definitely think we're going to see some revenue synergies you know I've, obviously, it's it's hard enough to predict our our own banking business, one or two quarters out. So we're we're going to be conservative with.
How we.
Project in predict their business, but yes, we definitely think there'll be synergies, but like when we announced the deal we're going to be cautious about projecting specific revenue numbers on that.
Yes that makes sense just looking for the context appreciate it.
Follow up here, so I heard the commentary on the advisory pipeline.
Here is still strong.
We have seen just to the industry level modest softening, it's kind of the larger ended the M&A spectrum in recent months it doesn't sound like you're seeing much change in the tone in the middle market. So.
Possible can you maybe give a little more context around how the backlog has been trending whether it's been filling back up at the same pace that you'd be able to being completed, especially given the you'll have a better back after the year here.
Depletions and I, just whether there's been any notable change in kind of the cadence of new announcements.
Yes, I would say, obviously, we anticipate that question because it certainly seems like for the last.
Four to six quarters.
That's on everybody's mind with sort of the macro environment and while we.
Acknowledge some.
Some potential macro environment changes with the election, and trade and Brexit and other things that.
Volatility that affect deal and we also just think it's a very big market and you know we're a small part of the market that with the execution, we can continue to grow.
You know branded with the market dynamic it's.
Tougher to have a really big growth rate, but we just haven't seen.
Material decline sort of in our new transactions, new announcements and frankly, we're off to a good start.
This quarter with just.
Closed transactions and new signed.
Transaction. So I think that is a function of the middle market and volumes and while were.
Cautious about the macro we're still pretty optimistic at least about our short term prospects here.
Okay terrific.
The last one around the non comps for Tim I heard the commentary around.
Just the ratio will decline is there anything more specific and give us on the range or any more color to think about noncompensation expenses moving forward in the fourth quarter I guess at least.
Yes.
I think specific to the to the fourth quarter.
It's still goes back to kind of the the level that you know the we've talked about I guess if at the end of Q2 with the full quarter of Weedon I think the sort of that 47 to 49 that we talked about last last quarter is the sort of the appropriate range for Q4.
And then yep projecting this out for 2020 with both with both Sandler.
We.
We've talked about sort of what the you know the absolute dollar range of that should provide.
Some some modest decline in terms of the non comp ratio.
So you know will will.
That will be helpful from from a margin standpoint, but we'll expect to see that continue to.
Tim to move in that direction over overtime.
Yes, okay terrific. Thanks, a lot closer.
Q.
Your next question comes from the line of Chris Awash with Buckingham Research group.
Hey, good morning, good morning, Chris.
So I think in the prepared remarks, I heard you guys say that you're expecting equity brokerage revenues to trends around 130.
In 2020 was that correct.
Yes, that's correct inclusive of Sandler.
Okay, so kind of just pulling that apart.
Are you expecting the majority of the revenue dis synergies as you integrate weed and sandler to come from the we'd inside of thanks.
Actually I I guess just to contextualize as I kind of look at a blended.
On average revenue for trading day for all three businesses over the last couple of years that kind of imply a oneseventy number assuming no synergies.
2020.
Yes, let me take that in a couple of parts. One obviously, we're looking at just overall market conditions and trends in the business. When we make those projections secondly, we're looking at obviously, there's both account overlap and in particular with Sandler.
There's meaningful research coverage overlap, which we obviously have to take into account as well.
And so really taking account market conditions trends in the business account overlapping research overlap those are all the factors that go into that $130 million level that we're comfortable with.
Okay got it.
Hello.
Yes, and I would just that Chris. This is this hasn't really changed from.
When we first announced Sweden, which is why we thought we would just be a little more specific on guidance given we recognize we're pulling three complicated parts together and we wanted to give people the best picture we could.
Awesome and Chris one more thing maybe I would just add to that is as we look at the.
Overall cost synergies the majority of that came from the lead inside and that all is incorporated into.
Our ability to earn a solid margin and good return it at that $130 million level.
Okay, Yeah totally makes sense and then just last one for me was share count.
We saw a period on share count tick up 1% sequentially in Threeq you.
Just what are your expectations for.
Sure I guess into the back.
That part of the year and Sandler closes in one to 20.
Yeah, Chris I'll take that so I wouldn't expect.
Really much of a change in share count in Q4.
We have talked about.
As Sandler comes in.
Issuing of shares there.
For the you know the structure of the deal we won't actually go above 20% of our current outstanding share count so.
You can sort of do that math in terms of another.
2.8, 2.9 million shares coming in.
At the time, we closed the Sandler acquisition.
Yeah, I would just that Chris I, obviously in the past we've been pretty focused on.
Managing that number and while it's ticked up a 100 or 200000 shares we've been pretty busy with transactions with advisory and lead in Sandler and certainly locked out of.
Certain window. So we're focused on managing that and I think Tim sort of gives the right guidance you can add 20% to that that current number and thats a good share count number for next year.
Okay. Thanks, Thanks, Tim.
Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Mike Grondahl Northland Securities.
Yes, congratulations everyone.
Thanks Lakers my question.
On the advisory business.
You are kind of coal about Q1 health care Q2 energy Q3, industrial so it's really good to see that diversity.
What are your gut tell you for Q4, I mean, which group do you think is going to win.
Yes, I think Mike I mean that we've got pretty good visibility, obviously on announced and signed deals. So healthcare is our largest business.
And we've got some nice transactions I expected for Q4 so.
No my gut my gut is healthcare I think we really made that point.
Relative to the fact that everybody knows healthcare is our largest business, but we've made some fantastic organic growth progress with both our industrials and consumer business.
Great Yeah, it's good to see diversity.
Secondly in fixed income.
Seems like.
Lower rates have been a nice kind of a.
A little bit of a market tailwind.
Can you just highlight dead, maybe kind of what you guys are also doing to take share.
Other than just benefiting from a little bit of Tailwinds out there.
Yes, it's a great question, Mike and I think you know that whether or not its tailwinds, there's definitely been volatility in rate, which is something that.
Managing and I think the overall level of rate.
It's really driving clients and into the market and especially in the taxable side in particular I'm, putting some money to work.
Typically to what we're doing I would say the primary thing that we've been focused on is just that focus focus on different client verticals and making sure that we're adding.
Value in those be at public entities and bank money managers, our eyes and focusing both our analytics and the products that we are focused on in line with those client verticals.
Got it then maybe lastly.
One of the highlights of the we deal was you guys would expand your distribution on equity deals and whatnot, whether their IPO as or secondaries do you feel like you've had a handful of deals where that distribution is has came in and help to that made a noticeable.
Difference or what do you see there.
Yes, Mike I would say, it's still early days there I can depth I definitely have a couple of anecdote on.
Specific a couple of specific transactions.
We're still pretty optimistic with that expanded account base I think we also have knowledge that.
August and September sort of our first couple months with these results was pretty slow on the SCM. So I don't want to overstate the revenue impact of that but we are still you know we are selling that to clients. We do believe we have that expanded account base and we do think it's going to benefit all of our CLO.
Ryan.
But it hasnt shown up quantifiably yet.
Got it got it okay. Thanks a lot.
Thanks, Mike.
There are no further questions Mr. Abraham I'll turn the call over to you for closing remarks.
Okay. Thanks, operator, we believe that we are well positioned for a strong finish to the year. We very much look forward to updating you again in early 2020, thanks, everybody have a great day.
This concludes today's conference call you may now disconnect.