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Piper Jaffray Cos  (NYSE:PJC)
Q1 2019 Earnings Call
April 26, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Piper Jaffray Companies conference call to discuss the financial results for the first quarter of 2019. During the question-and-answer session, securities industry professionals may ask questions of management. The Company has asked that I remind you that the 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.

This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. 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 SEC website. As a reminder, this call is being recorded.

And now, I'd like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

Chad Abraham -- Chief Executive Officer

Good morning, everyone. I'm here with Deb Schoneman, our President and Tim Carter our CFO. And we would like to thank you for joining the call to discuss Piper Jaffray's results for the first quarter of 2019. Despite a slow start to equity and debt capital raising, our advisory business performed well and we generated $191 million of adjusted net revenues, one of our strongest starts to a year on record.

Adjusted pre-tax income was up meaningfully year-over-year, driven by increased revenues combined with disciplined expense management. Our strategies to drive shareholder value remain consistent as we begin 2019. We are focused on driving revenues higher through market share gains and continued sector, geographic and product expansion. Revenue growth combined with enhanced scale and operating discipline will expand margins and increase profitability.

We were excited to announce the signing of a definitive agreement for the acquisition of Weeden & Co. during the first quarter. The combination of Weeden's highly ranked agency execution platform and Piper Jaffray's strong research platform, builds a market-leading middle-market equities business. When closed, we believe the transaction will enhance the scale of our equity sales and trading business, elevate our relevance with clients and add resilience across market cycles. Deb will provide more details on the transaction in her remarks.

I'll first provide an update on our advisory and equity capital markets businesses before handing the call over to Deb to discuss the rest of our business lines. Tim will follow with a review of the financials and an update on capital use. We will then open up the call for questions.

Advisory revenues of $115 million, representing 60% of our quarterly revenues drove our strong results for the quarter. Despite the length of the economic expansionary cycle, activity in US middle-market M&A, our primary market, remained strong. M&A activity has been driven by solid economic growth domestically, ample financing availability and secular changes in technology and innovation, driving the need for strategic acquisitions and divestment activity.

Our deal activity in terms of the number of transactions was consistent with the year-ago period, but our overall deal value increased. We completed 35 transactions with an aggregate enterprise value of $11.9 billion in the quarter versus 36 completed transactions with an aggregate enterprise value of $5.2 billion in the year-ago period. The increased revenues in the current period were driven by a couple of large deals closed by our healthcare and consumer teams.

As exhibited by the closing of these two larger deals, we increasingly win mandates to advise on more significant transactions with larger fees in our industry-leading franchises. As we've discussed in the past, the timing of deal closings, as well as the number and size of deals, can create some variability to our quarterly results. We believe our full-year advisory pipeline for 2019 remains strong.

Equity financing activity in the quarter was slow as the federal government shutdown extended into late January and market participants were cautious after the steep sell-off in the fourth quarter. We generated $14 million of ECM fees in the quarter, down significantly from the levels in (technical difficulty) 2018.

Our ECM pipeline is strong with several broker and IPOs (ph) and backlog and a market that is conducive to equity capital raising. As a result, we expect our equity financing revenues to increase from Q1. Our Investment Banking Managing Director headcount continues to increase on a net basis, as internal promotions and hiring have exceeded retirements and attrition for four consecutive quarters. We increased our MD headcount to 91 in the first quarter, representing 6% growth year-over-year. Of our 91 investment banking MDs, approximately two-thirds represent internal promotions demonstrating our sustainable culture and success developing future leaders.

We believe our focus on internal development of talent provides the highest return on our investment and provides us a competitive advantage in the marketplace. Looking ahead, our recruiting pipeline is strong with two healthcare MDs committed to joining our platform in Q2. Our strong financial performance, the diversity of our platform and resources, and our culture of client-centric advice, continue to make us a destination of choice in the marketplace.

Now I will turn the call over to Deb to discuss the rest of our business lines.

Deb Schoneman -- Managing Director, President

Thanks Chad. The first quarter saw reversal from the 2018 fourth quarter sell-off as both equity and fixed income securities rally. Equity market indices were up 12% to 15% sequentially, yet volatility and volumes were relatively subdued. In the fixed income markets, the yield curve briefly inverted during the quarter and ended the quarter flat. Our equity brokerage business generated revenues of $16 million for the quarter down year-over-year. Our core equity secondary trading revenues were down approximately 5%, driven by lower volumes. Additionally in the year-ago period, we generated higher block trading revenues, which can be more variable from quarter-to-quarter. We expect revenues to increase from these levels as we move further into the year, as there is some seasonality to this business as research checks tend to increase as the year progresses.

As Chad mentioned, we announced the signing a definitive agreement for the acquisition of Weeden & Co. during the first quarter. The transaction is expected to close early in the third quarter and we are on plan with our integration. Client reaction to the announcement has been extremely positive as clients see the value proposition in combining our two firms. All key Weeden personnel has signed employment agreements to join the combined platform upon closing, and are already working collaboratively with us to ensure seamless integration. We're excited by the affirmations from clients and employees on the cultural and strategic fit of the two strong franchises and the potential of our combined platform.

Turning to our public finance and fixed income brokerage businesses, we generated $13 million of debt financing revenue in the quarter, up from the very slow year-ago period, which was impacted by tax reform. Municipal underwriting volumes started 2019 slower than we anticipated, which negatively impacted first quarter results. We expect debt financing activity to rebound to more normalized levels aided by lower interest rates as the year progresses. As a result, we expect higher municipal issuance volumes, which will benefit this business as we believe our pipeline is strong.

As we noted in the past, we intend to continue investing in our public finance business by expanding geographically and leveraging our market leadership to attract talent to the franchise. In the first quarter, we announced the hiring of a senior banker in Pennsylvania, one of our targeted growth areas. In addition to strength and distribution of our specialty sector financing, we hired a senior trader and underwriter as co-head of our high-yield and structured product desk.

We recorded $24 million of fixed income brokerage revenues in the first quarter, up significantly from the year-ago period. Market conditions in this business improved significantly driven by strong returns in the municipal asset class. Renewed investor interest in tax-exempt products drove positive flows into muni funds, increasing activity in the market from which we benefited.

In addition, our taxable product revenues were strong driven by investor demand. We remain focused on positioning inventory to meet client needs. With low absolute interest rates and a flat yield curve, we saw client activity flow toward the end of the quarter, which may moderate revenues from these levels during future periods.

Finishing up with asset management, AUM of $6.3 billion at the end of the quarter, increased sequentially as the equity market rallied in the first quarter driving market appreciation in all of our product offering. Revenues decreased compared to the year-ago period as we experienced some client outflows and market depreciation during 2018. Investment performance was good in the first quarter as many of our product offerings outperformed their relative benchmarks generating alpha for our clients.

Now I will turn the call over to Tim to go through our financial results in more detail.

Tim Carter -- Managing Director, Chief Financial Officer

Thanks Deb. My comments will focus on our adjusted non-GAAP financial results. Our quarterly revenues were $191 million, up compared to the year-ago period driven by higher advisory revenues and improved performance in our fixed income business, offset by significantly lower equity capital markets activity. Revenues were down compared to the sequential quarter due to lower overall investment banking revenues.

Our diluted EPS for the quarter was $1.57, up $0.19 per share on a year-over-year basis. The increase in EPS was driven by higher revenues and lower share count, partially offset by a lower tax benefit related to stock vestings. The most relevant comparison of our operating results is reflected in the 34% increase in pre-tax operating income compared to the first quarter of 2018. Operating margin of 14.7% expanded 220 basis points from the year-ago period driven by the operating leverage in our business.

Turning to our operating expenses, the comp ratio for the quarter was within our target range of 62% to 63% and non-comp expenses were at the low end of our $43 million to $45 million per quarter range. We came in at the bottom end of our non-comp range primarily due to lower deal-related expenses given the dropoff in activity in our equity capital markets business. We will provide more guidance on the estimated impact to our comp ratio and non-comp expenses from the pending Weeden acquisition on the second quarter earnings call.

Our adjusted tax rate for the quarter was 18%. The vesting of restricted stock grants often creates volatility in our first quarter tax rate. We recorded a $1.7 million tax benefit in Q1 related to restricted stock vesting at prices greater than the grant date price. Excluding this benefit, our adjusted tax rate was 24% for the quarter. Going forward, we maintain our full-year estimated tax rate range of 25% to 27%, excluding the impact of stock vestings.

Finishing up on capital, we continue to maintain robust capital levels. During the first quarter, we repurchased $40 million or approximately 564,000 shares of our common stock at an average price of $70.47 per share. This more than offset the dilution arising from restricted stock issued to employees in February 2019 as a part of their 2018 compensation. We also continued to return capital to shareholders through dividends. In the first quarter, we paid a special annual cash dividend of $1.01 per share related to 2018 adjusted earnings. Together with the regular quarterly dividend, we returned approximately $20 million to shareholders this quarter. In addition, today we declared a quarterly dividend of $0.375 per share to be paid on June 14, 2019 to shareholders of record as of the close of business on May 24, 2019.

Our acquisition of Weeden & Co. will require us to deliver approximately $25 million of cash at closing, which will be fully funded from cash flows from operations. With no debt on our balance sheet, we have the flexibility to pursue all of our growth initiatives, including additional corporate development opportunities.

Finally, we remain prudent in allocating capital. Inventory levels ended the quarter at $640 million consistent with year-end and a reflection of our focus of providing advice to clients rather than deployment of capital.

We will now open up the call for questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from the line of Devin Ryan from JMP Securities. Your line is open.

Devin Ryan -- JMP Securities LLC -- Analyst

Great. Good morning, everyone.

Chad Abraham -- Chief Executive Officer

Hi, Devin.

Deb Schoneman -- Managing Director, President

Good morning.

Devin Ryan -- JMP Securities LLC -- Analyst

Hi. Maybe first question here on some of the M&A activity in kind of the advisory boutique space recently, we've seen fair amount of deals announced recently. There's been several financial services focused firms. And I know you guys have had some interest on kind of bulking up your financial services advisory capability. So, I'm curious if you've been looking at these transactions and if seller expectations have maybe increased or for some reason they've been less interesting? And then just more broadly, expectations for potential roll-up acquisitions because you guys have done your number and done them well recently.

Chad Abraham -- Chief Executive Officer

Yes. Thanks Devin. Yes, obviously we've had a lot of success with Simmons and Edgeview and PCG and some of the industry teams. We're always active and looking. I do think the pace of certainly things we're seeing has picked up. I also think it's fair to say versus a couple of years ago, there is definitely more people looking. But what I would say is, it's not really just about competition. It's a lot about sort of the personal fit, the fit of the people, what we can do for their business, do they feel like they can get a uptick in revenue lift. So we're certainly active and optimistic about the pipeline in that regard, but you never know how to predict which ones you're going to get done.

Devin Ryan -- JMP Securities LLC -- Analyst

Got it. Okay. That's helpful. And maybe another one just on advisory, we just want to maybe parse through some of the commentary on the pipeline. So you had a nice start to the year, obviously in revenues there and hear the comment about the pipeline being more back-end weighted. So I guess, I'm just trying to think about does that imply maybe a little bit softer second quarter with kind of a big back half, or is it that the back half is so strong that even with a good start to the year, it could still be quite a bit better? I know it's a lumpy business, but just trying to kind of think about the -- what's implied in that comment.

Chad Abraham -- Chief Executive Officer

Yes. I mean, this is always one of the toughest businesses to measure quarterly. Obviously, we had a spectacular Q1 in advisory, being up 50% year-over-year. That is certainly not the run rate we think we're on for the year. But -- and we definitely think Q2 will be down from the advisory levels of Q1. But the pipelines are good, we have a very good backlog, and yes, certainly expect a strong year for advisory.

Devin Ryan -- JMP Securities LLC -- Analyst

Got it. Okay. Great. Maybe shifting gears here a little bit, the fixed income brokerage business I think came in quite a bit better than expectations out there, and obviously it was a better quarter than you've had in sometime. So I heard the remarks around here there's some stronger client activity, but also sounds like some gains in positioning on inventory. So I'm just curious if we could maybe parse through that and just think about how much of the $24 million was driven by kind of inventory marks? And whether really more should we just be thinking still about kind of where you guys had been in the range kind of the mid-to upper-teen million dollars of fixed income brokerage as kind of a baseline just trying to think about for a model?

Deb Schoneman -- Managing Director, President

Sure. When we start to look at the quarter, it's always a little difficult to differentiate between what are really trading profits and customer activities when you're dealing with trading and spread. Maybe the best way to characterize it is really two-fold. One, we saw increased customer activity inflow, and at the same time our traders did a really good job of getting in the middle of where that activity was. For example, you saw really positive fund flows in the muni funds, which created a lot of activity in the market. And what I would say is maybe different from historically, as we've really been doing that and generating those revenues without taking on additional risks, inventory stated very low levels as we spoke to, relative to where we were at year-end. And overall markets will improve which helps of our performance. As we look out into Q2, again, it's always difficult to predict the markets. But we do expect some slowdown just given those level of -- low levels of interest rates and where the muni ratios are and just looking at some of the trend we saw during the first quarter.

Devin Ryan -- JMP Securities LLC -- Analyst

Got it. Okay. Great. And then maybe one just on the equity capital markets, equity underwriting. Clearly, most firms were affected by the government shutdown, some of the aftershocks of the fourth quarter volatility. So just trying to think about kind of the trajectory of the pipeline there, and then maybe kind of more broadly kind of a full year expectation, if you can, just based on where you sit today. Just how strong those pipelines are and whether there was a fair amount of pent-up activity that got pushed from the first quarter, because of timing dynamics with the shutdown and so that could really boost the second quarter and beyond? Just trying to think about some of the moving parts there.

Chad Abraham -- Chief Executive Officer

Yes. I think Devin, obviously it was a very challenged ECM quarter for us especially when you look -- versus last year, and it's definitely true the government shutdown affected the first half of the quarter. I also think it's tough to measure market share on one month, but we certainly also didn't have a very robust March. And that resulted in a tough ECM quarter. I do think our pipelines are much better. We're definitely seeing visibility. We absolutely expect to see ECM pick up in Q2 in the back half. Obviously, there is a lot of ground now to make up off of a soft Q1. But the pipelines are good and we definitely expect an improved run rate. We'll just have to see if we can get enough business done to make up for the gap in Q1.

Devin Ryan -- JMP Securities LLC -- Analyst

Got it. Okay. Great. And then just last one here on capital. A strong quarter of share repurchases. And I'm curious whether that was kind of a reflection of the view on the stock or just as excess capital built that was the most efficient way to accommodate and just trying to think about if there is any implications going forward? I know you have some cash needs for Weeden, but just trying to think about whether these prices there's just more appetite for repurchases broadly given your view of the stock.

Tim Carter -- Managing Director, Chief Financial Officer

Yes. Devin I'll take that. I think it is a combination. We do continue to generate cash and capital and look for ways to deploy that. But certainly I think in Q1, as we did in Q4 of last year, where the stock was at and where we were able to get things done in Q1, we thought was attractive as well. So we'll continue to evaluate that as we go forward. Again, we are also focused on just the liquidity and flow to the stocks. So we'll balance that as well, but you're right, we've been pretty active over the last couple of quarters. So that may moderate a little bit.

Chad Abraham -- Chief Executive Officer

Yes. And Devin I think -- Devin, I would just add to that. I think Tim said it well. I mean we're not really changing the stance on stock buybacks. I mean, we look at it very opportunistically and in -- just like in Q4, there were some chances when the stock was in the 60%s (ph). There were chances in the beginning of the quarter where it was very reasonable as well. And you just look at that and it's certainly one of the best tools. But we're definitely not on a plan to sort of buy stock every quarter no matter what the price is. We look at that as a -- like we look at all other sort of return situations.

Devin Ryan -- JMP Securities LLC -- Analyst

Got it. Perfect. Well, thanks for taking all my questions and congratulations on the nice start to the year, and clock's in.

Chad Abraham -- Chief Executive Officer

Thank you.

Deb Schoneman -- Managing Director, President

Bye, Devin.

Operator

(Operator Instructions) Our next question comes from the line of Mike Grondahl from Northland Security. Your line is open.

Mike Grondahl -- Northland Security, Inc. -- Analyst

Hi. Congratulations on the M&A progress and the pipeline. My first question, really on the equity financing side, it sounds like the pipeline is pretty solid there and you're positioned for a better rest of the year. Can you talk a little bit about the pipeline mix? Previously you had called out energy and healthcare is always pretty strong, kind of a mix of that pipeline would be helpful.

Chad Abraham -- Chief Executive Officer

I think Mike, it's quite a bit like it has been the last few years, which is just heavily dominated by healthcare. I mean, we always look at sort of the market segments and specifically market caps under $2 billion, $3 billion, $4 billion. There's been times in the market where the -- half of that entire fee pool is healthcare. And so we expect that to continue. And when the mix of ECM is heavy, healthcare, that's certainly good for us. We do expect -- we're obviously off to a slow start with energy. Obviously, you've seen quite a big move in energy prices. I personally think that will lead to a better back half for ECM energy and M&A for energy. So I would say that would be another sector I would call out as a good possibility. And then we've been on several of these technology transactions, obviously as a smaller player, but there's been quite a bit of volume. So we expect that to continue this year as well.

Mike Grondahl -- Northland Security, Inc. -- Analyst

Great. It sounds like you're adding two MDs in healthcare in 2Q. Should we expect or kind of plan for a couple more MDs the rest of the year in banking or how should we think about that?

Chad Abraham -- Chief Executive Officer

Yes. I think we -- our goal is always, as we've stated a few times, to try to add four to five net MDs. And obviously, we're adding a -- we're excited to talk about it on the next call, a couple of healthcare MDs. It would certainly be our expectation that we could add a couple more net MDs throughout the rest of the year. But that -- we only have a few more months to get that done and you never know if we'll come to the right deal. But we're certainly hopeful on that.

Mike Grondahl -- Northland Security, Inc. -- Analyst

Great. Great. And then maybe one for Deb. Just -- what's your confidence level on sort of debt financing and debt trading for the rest of the year? '18 was really challenging. What kind -- you're four months into the year, what kind of year you think '19 will be at a high level?

Deb Schoneman -- Managing Director, President

Yes. We had talked about really coming into the year looking at the overall volume and really speaking to the municipal market issuance on being up 10% to 15%. I think that was really a view that was held pretty widely on the Street. And I would say Q1 was lower than anticipated. So not sure yet, exactly what that means for the total for the year. I would say what we're seeing is definite pickup in our pipeline and view that as being quite strong. So maybe a little difficult to predict, but definitely see issuing levels rebounding as we go through the year in part aided by these low interest rates.

Mike Grondahl -- Northland Security, Inc. -- Analyst

Great. Well, hey, thanks a lot and congratulations on the quarter.

Deb Schoneman -- Managing Director, President

Thanks, Mike.

Chad Abraham -- Chief Executive Officer

Thank you.

Operator

And we have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

Chad Abraham -- Chief Executive Officer

Okay. Thanks, operator. We're very pleased with our start to 2019 and we look forward to updating you all again following the second quarter. Thanks, everybody. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 27 minutes

Call participants:

Chad Abraham -- Chief Executive Officer

Deb Schoneman -- Managing Director, President

Tim Carter -- Managing Director, Chief Financial Officer

Devin Ryan -- JMP Securities LLC -- Analyst

Mike Grondahl -- Northland Security, Inc. -- Analyst

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