PJC
#Good morning.
We are off to a strong start in 2017, driven by the ongoing momentum in our advisory business, which began the year with our second highest quarter ever.
Healthier equity capital markets plus our relatively strong results in fixed income brokerage both helped to kick off the year on a very positive note.
Let me provide some more color on the markets and our performance, then I will turn the call over to Deb to discuss our financial results in greater detail.
Advisory markets remain constructive, and we continued to outperform the market with record first quarter advisory revenues, while the pace of deal activity in the U.<UNK> slowed compared to the prior year and sequential quarters.
Contributions from our industry groups essentially tracked the market as we were led by the energy team followed by healthcare and consumer teams.
Our expansion into the energy sector last year through the acquisition of Simmons continues to generate good returns.
The combination of a talented team of bankers, relatively stable market conditions, our broader product suite resulted in the energy team registering another strong quarter.
While we have enjoyed steady gains in the advisory business, we recognize that results can be lumpy depending on the timing of deals closing.
However, we believe that the combination of high confidence levels expressed by CEOs and small business owners, economic stability and relatively available capital will result in conditions continuing to be constructive for the business.
Our equity capital raising results improved significantly both sequentially and year-over-year.
The year-over-year rebound has been dramatic, coming off a trough in the market cycle in Q1 of 2016.
We continue to experience steady improvements in capital raising.
And while we achieved a dramatic improvement in results year-over-year, on a sequential basis, our performance was in line with the markets in which we compete.
If the current economic outlook remains in place, we would expect relatively conducive conditions for steady capital raising throughout the year.
As anticipated, debt capital raising, consistent largely of our public finance business, saw a decline in Q1 from the record fourth quarter.
There are a number of factors which impacted the markets.
With significantly higher interest rates since last summer, refunding activity is off and uncertainty regarding tax reform is putting a damper on the markets.
Finally, there is some element of seasonality since Q1 is traditionally the slowest period of activity for the market.
While we were down sequentially, we were flat versus a year ago compared to markets that were 11% lower.
We are pleased with the gain in market share, and while we would expect our results to improve throughout the year, we believe overall issuance in the market maybe down 10% to 15% from last year's record level.
Moving over to our brokerage activities.
Equity trading volumes remain challenging.
Market wide, average daily trading volumes were down 3% sequentially and 20% year-over-year, while our revenues were down 20% sequentially and up 2% year-over-year.
We are also seeing the shift to passive investing adversely impacting this business.
Low interest rates, slow but steady economic growth and historically low market volatility combined to favor passive investing.
Our client base of active managers and hedge funds have found it challenging to attract investment dollars and thus have less cash to deploy into the market.
Perhaps the most significant factor is the lack of volatility.
In Q4, the postelection period triggered considerable volatility and market activity which was reflected in our results, which were over 20% higher than in Q1.
The addition of energy and FIG sectors into our coverage universe kept us flat year-over-year against markets that declined but at a cost.
We remain vigilant to the challenging conditions in this business and are managing our costs prudently to maintain a margin in the business.
In fixed income, we produced strong results that were up meaningfully both sequentially and year-over-year on the strength of our risk management and trading capabilities.
Our long-standing expertise in municipals enabled us to effectively navigate the volatility in the markets and generate trading profits.
Overall, flow activity remained constrained during the quarter.
Customers sat on the sidelines due to uncertainties arising from the potential impacts of future tax policies, interest rate direction and economic growth.
We expect customer flows to remain light until there is more visibility into some of these factors.
Finally, our Asset Management business, which has been buffeted from the same impacts of passive versus active investing, stabilized somewhat.
Performance in most of our key products improved during the quarter, led by our small-cap growth strategy.
MLPs, our largest product group, gave back a little performance during the quarter after a strong outperformance in 2016.
Total AUM for the quarter was flat as net outflows of 2% were slightly offset by market appreciation.
During the quarter, we continued to make progress in our strategy of adding new investment teams and products to our platform.
The global team that joined us at the end of 2016 attracted about $250 million in new assets late in the quarter.
We expect additional assets will flow into the products throughout the year.
Now I will turn it over to Deb to discuss our financial results.
Thanks, <UNK>.
My remarks will be addressing our adjusted financial results.
We reported adjusted net revenue of almost $197 million for the quarter, down 10% sequentially and up about 30% year-over-year.
Last year's first quarter did not include meaningful contribution from Simmons, but excluding Simmons, revenue would still have increased year-over-year.
Our business mix while still weighted toward advisory, was much more balanced during the quarter compared to a year ago.
Overall, it's been our strategy to weight our business mix more toward advisory, public finance and asset management and these areas represented over 62% of our revenue for the quarter.
As <UNK> reviewed in his comments, advisory put up a strong quarter.
Capital raising was up in equity and also in public finance.
Equity brokerage was weaker and fixed income brokerage stronger.
It should be noted that we continue to manage our fixed income business with less capital.
Market conditions in Asset Management remain challenging.
Our strategy for this business is to manage costs carefully and reorient our product mix to those strategies that can be scaled and will generate higher margins over time.
Overall, we produced an operating margin of 16% for the quarter, which improved significantly compared to 10.6% in the first quarter of 2016.
A much more balanced business mix and increased revenue in this quarter drove a 200 basis point improvement in the comp ratio.
An operating leverage on noncompensation expenses from the incremental scale in the business produced 340 basis points of improvement.
The comp ratio for the quarter was a little over 64%, this is slightly over our target range and reflects both revenue mix and ongoing investments in the business.
We believe that the trade-offs between an elevated comp ratio and investing for growth favors growth at this point as we continue to gain significant operating leverage at higher revenue levels.
And this can be seen in our noncomp ratio, which again was sub-20% for the quarter.
We managed costs carefully throughout the quarter to keep overall noncomps at the low end of our $38 million to $40 million range.
For the quarter, we repurchased $19.8 million or 248,000 shares of our common stock.
This more than offset the dilution arising from restricted stock issued to employees as a part of their 2016 compensation.
I will finish my comments by addressing the tax line, which as you can see reflected a very low tax rate.
This is the result of new accounting guidance which was effective in 2017.
The new rules require us to recognize that income tax effects of stock-based compensation awards in the income statement win the awards vest.
If the stock vests at values greater than the grant price, it results in a benefit to income taxes due to the incremental tax deduction.
When stock awards vest at less than the grant price, it results in additional income tax expense.
Prior accounting rules required the tax benefits or deficits to be recorded within additional paid in capital.
Our first quarter 2017 results included $7 million tax benefit related to restricted stock vesting at values greater than the grant price.
Excluding the impact of the tax benefit, earnings per diluted common share would be $0.86 on a U.<UNK> GAAP basis and $1.32 on a non-GAAP basis.
We would expect the impact of this rule will be most pronounced in Q1 of each year.
I will now turn the call back to <UNK>.
Operator, we will now open up the call for questions.
Thank you, operator.
Thank you all for joining us today.
Have a good day.
