Piper Jaffray Companies (PJC)

PJC 
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Piper Jaffray Companies (PJC)

Q1 2013 Earnings Call

April 17, 2013 9:00 am ET

Executives

Andrew S. Duff - Chairman and Chief Executive Officer

Debbra L. Schoneman - Chief Financial Officer, Principal Accounting Officer and Managing Director

Analysts

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Wong - Morningstar Inc., Research Division

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 2013. [Operator Instructions] The company has asked that I remind you 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 earnings release and 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. Please go ahead.

Andrew S. Duff

Good morning, and thank you for joining us to review our first quarter results. I will spend a few minutes discussing the market environment and performance of our businesses and then, hand the call over to Deb to review our financial results.

Let me start with an overview of the market environment this quarter. Our businesses experienced mixed market conditions to start the year. On the favorable side, equity markets registered net inflows for the quarter compared to net outflows throughout 2012. This resulted in more accommodating conditions for our cash equities and Asset Management businesses. On the more challenging side, fixed income markets faced increasing headwinds as the quarter progressed due to uncertainty over interest rates.

In addition, M&A activity, particularly in the middle market, dropped off significantly compared to the last quarter of 2012. This was expected due to a surge in transactions at the end of 2012 in anticipation of higher tax rates in 2013, which we noted in our last earnings call. The impact of market conditions was evident in our results, particularly the drop-off in M&A activity.

For the quarter, we generated net revenues of $110 million, a sequential decline of 22% from Q4 2012 and essentially flat with the first quarter of 2012. The sequential decline, primarily, was attributable to lower revenue in our advisory business. However, due to our efforts last year to streamline our business, we produced solidly profitable results that generated an ROE of 5.5% compared to 1.6% 1 year ago.

In our capital markets business segment, public finance produced another strong quarter. Given the seasonality of this business, Q1 typically starts out slow so the sequential decline in activity from the prior quarter was expected. Year-over-year, however, our business was up 15% as we continued to realize market share gains attributable to the geographic expansion of our public finance business.

Our fixed income brokerage business performed well also. Revenues were up 19% sequentially and flat with Q1 2012. The expansion of our middle-market resources, coupled with solid strategic trading results, more than offset weakness in our flow trading during the quarter. During the quarter, we added 14 sales and trading professionals as part of our middle-market build out.

Results in our equity financing business generally declined both sequentially and year-over-year. We experienced a healthy capital raising environment in our focus sectors during the quarter. Our activity levels, as measured in number of transactions, were consistent with the overall market, but our results for the quarter lagged at the broader market. The number of bookrun transactions was lower than normal, and this depressed our average fee transaction during the quarter.

One area of recent progress was our investment banking business, where we are investing in the biotech subsector. This subsector represents about 1/3 of our focus sector's fee pool for the quarter. We recently added resources as part of our plans to pursue this opportunity.

I already mentioned the decline in M&A activity for the quarter. This decline has seasonal aspects to it, and the tax-driven activity at the end of 2012 contributed to this steeper decline. As the quarter progressed, we started to see an increase in pitch activity.

Performance in our cash equity business was consistent with the broader market. Our business was up sequentially and down slightly year-over-year as net inflows into equities in Q1 drove higher volumes. It should be noted that our cash equities business has improved sequentially for the past 2 quarters.

Moving on to our Asset Management segment. We benefited from pricing markets during the quarter and the business continued to produce strong margin for us. Revenues were up 12% sequentially and 10% year-over-year. Our assets under management at the quarter-end exceeded $10 billion. While net inflows into our products were flat for the quarter, our strategy to reach retail investors through our mutual funds continues to show steady improvements led by inflows into our MLP product.

Now I will turn the call over to Deb to review our financial performance for the quarter.

Debbra L. Schoneman

Thank you, Andrew. In the first quarter of 2013, continuing operations generated net revenues of $110 million. Net income from continuing operations was $10.7 million or $0.60 per diluted common share. And our pretax operating margin was 16.6%.

For the first quarter of 2013, compensation and benefits expenses were 60.4% of net revenues, down 30 basis points from the full year of 2012 and in line with our goal of 60% to 61%.

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