Piper Jaffray Companies (PJC)

PJC 
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Piper Jaffray Companies (PJC)

Q4 2013 Earnings Call

January 29, 2014 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

Presentation

Andrew S. Duff

Good morning, ladies and gentlemen, and welcome to the Piper Jaffray Companies Conference Call. Before we begin -- this is Andrew Duff. Before we begin, our review of 2013 results, as you can see, we've incorporated certain non-GAAP elements in presenting our results. Our objective in enhancing our reporting is to provide you with more clarity on the performance of our business by excluding items, such as noncontrolling interest from our consolidated investment funds in certain acquisition-related costs. Deb will provide more details on this, as well as our financial results.

Turning to our year. We had a very strong finish to 2013, with nearly all of our businesses up sequentially and year-over-year in the fourth quarter to deliver our best quarterly revenue since we went public in 2004. In general, we saw momentum build in our equities-related activities as the year progressed. The strong finish in our fixed income activities partially overcame challenging conditions we experienced in midyear. Our diverse mix of businesses combined to produce improved results over 2012 in all key metrics, including revenues, net income and most importantly, return on equity. For the year, we generated an ROE of 6.2%, an improvement over last year's 5.7% and a substantial improvement over 2011's ROE of 2.3%

The comparison versus 2011 is important since it marked a key inflection point for us. In the midst of serious market dislocations in 2011, we embarked on a series of strategic steps with the overall objectives of producing meaningful improvements to our ROE over the near to mid-term and generating solid profits in any market environment.

Also, we believe that as we executed successfully on our strategy, we would strengthen our position as an attractive platform for professionals and firms. We continued our substantial progress in achieving these objectives in 2013.

In addition to the improvement in ROE, we generated solid results during the periods of serious market dislocations mid-year in our key markets, and 2 firms and several significant groups elected to join us during this year.

This progress was attributed to strong execution on our key objectives. First, delivering the benefits of diversification in our business model. Early in the year, anticipating weakening fixed income markets and strengthening equities, we reduced our exposure to fixed income and deployed capital into our equities and asset management businesses. These businesses, together with our equity capital raising business, contributed meaningfully to our strong results.

Second, focusing our resources in our strongest and highest-margin businesses. The areas of specific focus were public finance, asset management and advisory services. The acquisition of Seattle-Northwest was an important step in building out our national footprint in public finance in the acquisition of Edgeview, plus the addition of an investment banking team from Partnership Capital Growth expanded our M&A resources.

Lastly, judicious deployment of firm capital into areas where we have a differentiated expertise and market opportunities. We rebalanced our investment profile by reducing our exposure to fixed income while increasing our exposure to equity markets, as we saw performance in these markets shift during the year. In addition, other areas where we benefited from the strength of our execution included risk management that enabled us to navigate difficult markets, discipline in hiring and strong performance by our corporate support services team that enabled us to close our acquisitions on time, realizing expected cost synergies and smoothly integrate operations.

Now I will spend a few moments highlighting the performance of our business in 2013. In public finance, we continued to gain market share. While industry volumes were down more than 15% for the year, our business was close to even with 2012.

Our product diversity and industry sector strengthened, helped overcome weak refunding activity in the second half of the year. We feel these advantages will help us weather what we expect will be challenging markets in 2014 and will position us as an attractive home for professionals or firms seeking more stability. Our performance in fixed income brokerage was satisfactory, in light of the serious market dislocations in mid-year. We expanded our middle market sales force by about 30% in 2013 with the addition of 2 major teams and select hiring, and we added to agency mortgage product capabilities.

We are positioned for gradually rising rate environment in 2014 and should benefit from seasoning of the 2013 additions to our platform.

Switching to our businesses that participated in the equity markets. Market gains of 30% for the year provided robust conditions for equity capital raising, trading and investing activities. For the first time since 2007, revenue from equity capital raising exceeded $100 million for the year. Our health care team, bolstered by our added resources in biotech, led the way with solid contributions from our consumer and TMT teams. Notably, we served as book runner on about half of our transactions for the year, which has been a focus for us within our capital raising businesses.

Our M&A business finished the year on a high note as we recovered from dormant markets through mid-year. We experienced increasing demand through the second half of the year and feel good about our prospects as we head into 2014.

In our equity brokerage area, we continue to make steady, consistent progress. The business improved sequentially each quarter this year. Our great accomplishment, given the market-wide trading volumes [ph], were slightly down for the year. Our momentum in this business has come from a set of client-focused product strategies, which we began implementing in 2012 and more effective deployment of capital in the business. Capital was used more efficiently in our trading desk, and we also allocated some capitals to strategic trading activities in equities as we saw the opportunity to generate investment returns emerge early in the year.

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