PJC
#Good morning, and thank you for joining us to review our second quarter results.
The firm generated strong performance for the quarter led by our advisory business, which continued its string of exceptional results with a record-setting first half.
Overall, the markets were conducive for our capital-raising and advisory activities during the quarter: slow, but steady economic growth; extremely low volatility; and an ample supply of capital created favorable conditions for these products.
Conversely, some of the same conditions provided challenges for our trading activities.
Specifically, historically low levels of volatility in both equity and fixed income markets served to dampen our trading volumes during the quarter.
I would like to provide some additional color in each of business areas, starting with equity capital raising.
We were pleased with our equity capital raising results.
This business, which, for us, was heavily concentrated in our healthcare practice in Q1, broadened out in the second quarter with meaningful contributions from our energy and FIG teams.
We see this as further validation of our strategy to diversify our businesses by expanding into those important industry verticals over the past couple of years.
Through the first half of this year, we have seen a strong rebound in capital raising compared to the tepid conditions in the first half of 2016.
With the [sequel] on our target markets up about 115%, our performance is essentially in line with the market.
As I noted at the outside of the call, our advisory business produced another strong quarter led by our consumer team with meaningful contributions from our healthcare, energy and diversified industrials teams.
Our results were consistent compared to the robust performance we recorded in Q1.
This demonstrates the breadth of our platform, as investments we have made across multiple industry groups continue to produce strong returns.
Results in the broader market were overweighted to a few mega deals, while conditions in the middle market segment remained conducive to strong deal activity in which we fully participated as indicated by our results.
Our public finance business rebounded from a seasonally weak first quarter, with revenues up over 30% sequentially.
Last year, we saw record levels of issuance in the public finance market, driven by robust refunding activity in response to interest rate levels.
Some of that activity represented an acceleration of potential refundings we might have expected this year.
Thus, as we anticipated, market activity is down about 15%, while we are down about 20% through the first half of 2017.
It should be noted, our decline is due to an exceptionally strong Q2 last year.
Moving on to our brokerage businesses.
Market conditions were challenging for us in both equities and fixed income.
Low volatility and capital flows out of active managers continue to put pressure on the equities business.
We were essentially in line with the market with results that were flat sequentially.
Our results are down compared to the second quarter 2016, which were favorably impacted by the increased volatility generated from Brexit.
Our fixed income business confronted by challenging market conditions was down both sequentially and year-over-year.
Markets were characterized by low interest rate levels on an absolute basis, a flattening yield curve and very low levels of volatility.
Light levels of customer activity were correlated to low rates.
Our trading profits were reduced by low volatility as we saw few, if any, opportunities to deploy capital effectively against the market.
We continue to be measured in our application of capital in this business given these market conditions, as we are mindful that volatility could return unexpectedly.
In our Asset Management business, we registered net inflows for the quarter, driven by new accounts in the products we added this year, which more than offset outflows from our value equity products.
Ending AUM, however, is down sequentially as market depreciations in MLPs more than offset these net inflows.
Revenues were down sequentially and up 7% year-over-year.
The main driver for both of these variances was the market valuation in our MLP products, which accounts for about 1/2 of our AUM.
In response to fierce market headwinds in Asset Management, we continue to broaden and remix the range of our investment strategy to improve the attractiveness of our products across a variety of investors.
This year, we've added a global dividend growth product in a couple of quantitative strategies, and we're in the process of exiting our more narrow [DIPAM] value product.
While we relaunch our product mix to more scalable strategies, we are remixing for our products with lower fees.
Now I will turn the call over to Deb to provide some color on our financial performance.
Thanks, <UNK>.
Our remarks will be addressing our adjusted financial results.
Our second quarter results were consistent with the first quarter, with revenue just under $200 million and an operating margin of around 15%.
These results demonstrate the benefit of favorable operating leverage at higher revenue levels.
With 2 very strong quarters to start the year, our revenue was up 73% ---+ excuse me, $73 million or 23% higher than our start to 2016.
The revenue improvement was achieved with meaningful contributions by our equity capital raising and advisory products.
Capital-raising activities were propelled by healthy market conditions.
Our advisory business captured market share with strong performance across most of our industry teams, coupled with our expanded market coverage.
Our comp ratio continues to hover in the 64% to 65% range.
There are a couple of factors, which are leading to this level.
First, our mix, which is more heavily weighted to advisory, puts upward pressure on the ratio.
Second and maybe more important, we continue to seek opportunities to invest in the business organically.
We believe the operating leverage produced at higher revenue levels, over time, justifies our current comp level.
As we have stated previously, we expect our non-comp expenses to be in the $38 million to $40 million range per quarter.
For Q2, our non-comp expenses came in at the midpoints of that range.
We remain vigilant in managing our cost structure to ensure we realize the benefits of operating leverage for our shareholders.
The impact of leverage in our business model is clearly demonstrated in our results for the first half of 2017.
Our revenues were up 23%, while our operating income was up 66% year-over-year.
We achieved this by limiting the increase in our non-comp expenses to 5% compared to the first half of last year.
While results were very consistent sequentially above the operating line, our tax rate continues to fluctuate.
Tax expense was again favorably impacted by the vesting of our restricted stock awards at values above their grant date prices.
For the quarter, we recorded a benefit to income taxes of approximately $1.8 million.
In Q1, this tax benefit was $7 million.
The majority of our equity award vestings occur in the first half of the year, so we expect that the potential tax impact will dissipate throughout the remainder of the year.
The final item I will address is our adjusted return on equity.
We continue to make good progress as our ROE has moved ahead of our cost of capital.
Over the past 12 months, we achieved an ROE of 12.4%, which included about 100 basis points from the tax benefit in the first half of 2017.
And ROE above our cost of capital has been a long-term objective, and we have achieved this goal by effectively managing cost and capital as we grew revenues.
I'll now turn the call back to <UNK>.
Thanks, Deb.
Operator, we'd be happy to take questions.
So our outlook is very constructive.
We have a solid pipeline, and particularly, we're pleased with the progress in both energy and FIG.
With our energy platform, we really transitioned ---+ in the process of transitioning to a book runner, which has got much more favorable economics.
And our FIG platform is really beginning to ramp and has some book run businesses as well that we did in the first half, but the back half pipeline is solid.
Appreciate the question.
And as you suggest, we're in a transition period leading up to next January.
We have done quite a bit of work, and our basic belief is that you got to have quality differentiate a content, period.
Number two, that you got to really be diligent about where your resources are and where they're consumed and quantify how that consumption, if you will, with those clients who tracks the payments.
We've been hard at work at that and have some very good detailed data and are communicating currently, and we expect to continue to with our clients about that consumption and the balance with the revenue that's paid to the firm.
So that's our track.
Do think it could have an impact.
But we feel like we're having the right conversations to make sure Piper is fairly compensated.
From the breadth of the platform, I think we're in the zone as we continue to grow and develop subsectors in our industry verticals.
I would expect some, over time, the modest expansion to cover those new subsectors.
Sure.
A couple of thoughts in your question.
First of all is this is a fairly unique environment that's been long in duration, very, very low volatility.
Low absolute level of interest rates, and now you have a flattening yield curve.
That's about as tough a dynamic as you get.
Our belief would be that will change over time.
Probably the first thing that needs to happen is a little economic growth above the 1.5, where we've been 2.
And then you might see a shift there and some increased volatility.
We have a positive trading P&L for the quarter.
That's really very consistent with our history.
When there's some volatility and opportunity, particularly in the municipal market, we have a very strong track record of deploying capital successfully.
In an environment like this, we withdrew substantial capital.
It's on the sidelines, and we're going to wait to see opportunity.
But I think we performed very well for the environment.
And importantly, we feel like we're sitting in the right spot.
Looking forward, I would anticipate you might get some volatility, and we'll be prepared for that.
Maybe lastly, your tax question.
I do think that has an impact.
I think as we get closer to Congress really debating it and showing whether we're going to have progress or not, if they do achieve some of the tax policy, I think it would be quite favorable.
Thank you, operator.
Thank you everyone for joining us.
Have a good day.
