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| 8-K - FBR & Co. | form8ktranscript072810.htm |
FBR Capital Markets Corporation
Moderator: Shannon
Small
July 28, 2010
9:00 a.m. ET
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Operator:
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We will now begin the FBR investor call. I
will now turn the conference over to Ms. Shannon Small. Please
go ahead.
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Shannon Small:
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Thank you, and good morning. This is
Shannon Small, Senior Vice President of Corporate Communications for
FBR. Before we begin this morning's call, I would like to
remind everyone that statements concerning future performance,
developments, events, market forecasts, revenues, expenses, earnings, run
rates and any other guidance on present or future periods constitute
forward-looking statements. These forward-looking statements
are subject to a number of factors, risks and uncertainties that might
cause actual results to differ materially from stated expectations or
current circumstances. These factors include, but are not
limited to, the effect of demand for public and private securities
offerings, activity in the secondary securities markets, interest rates,
the risks associated with merchant banking investments, the realization of
gains and losses on principal investments, available technologies,
competition for business and personnel, and general economic, political
and market conditions.
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Additional information concerning these factors that
could cause results to differ materially is contained on FBR’s annual
report on Form 10-K, and in quarterly reports on Form
10-Q.
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Joining us on today's call is Brad Wright, Chief
Financial Officer of FBR. I would now like to turn the call
over to Rick Hendrix, President and Chief Executive
Officer.
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Rick Hendrix:
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Thanks, Shannon. Good morning,
everyone.
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Our second quarter results represented a meaningful
improvement from both the second quarter of 2009 and the first quarter of
this year. The improvement in our core results was a function
of much stronger banking revenues when compared to each of the prior
referenced periods.
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Despite these improvements, compared to particularly
weak quarters, we have recently taken important steps to reduce fixed
expenses by another $20 million annually to position the company to be
profitable at lower revenue levels. Specifically, we have
eliminated approximately 16 percent of the company's headcount as of the
end of the second quarter.
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I believe it's important to note that over the last
12 months, the company has essentially broken even on a core basis with
approximately $300 million of revenue. The steps we've taken
will position us to be meaningfully profitable at those revenue levels
going forward. In fact, on a pro forma basis, the second
quarter would have been profitable on a core basis at less than $70
million of revenue.
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Importantly, we believe that even with the
reductions, we've preserved the company's ability to grow revenues in our
equities and investment banking businesses, and we are continuing to
execute our strategy of broadening our franchise by growing our
non-equities trading businesses.
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With regard to the specific results for the second
quarter, our pretax core operating loss was $2.8 million for the quarter,
compared to a pretax core operating loss of 12.3 million in the second
quarter of last year, and 18.1 million in the first quarter of
2010.
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Investment banking revenues for the second quarter
were 40.4 million, compared to 8.7 million in the second quarter of 2009,
and 11.1 million in the first quarter of 2010. Included in the
banking results for the quarter is a $1.2 billion transaction, among the
largest in our history. Once again, underscoring for clients
and our investors the strength of our distribution
platform.
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So banking revenues have improved, and our pipeline
has broadened considerably. The outlook remains difficult to
predict on a quarterly basis. While overall results will
continue to be dependent upon the economic environment, our banking team
is positioned for strong performance as the market continues to
improve.
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Given the difficult trading environment across the
industry during the quarter, and specifically the volatility spikes in
May, institutional brokerage posted revenues of 24.3 million, compared to
33.7 million in the second quarter of 2009, and 27-1/2 million in the
first quarter of 2010.
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Though we expect a similarly challenging environment
in the third quarter, we do anticipate improved results as some of our
non-equities capabilities continue to mature and reach critical
mass.
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An area where we have seen an upward trend over the
last year is asset management. Asset management recorded
revenues of 3.8 million for the quarter, an increase from 3.2 million last
quarter, and 3.3 million in the second quarter of last year. We
continue to pursue opportunities to make asset management a more
meaningful contributor to our performance going
forward.
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The headcount reductions I referenced earlier were
focused primarily in back office, European operations and investment
banking. We expect these reductions will not have a material
impact on our revenue generating capacity, and will allow our European
operations to be a more positive contributor on a go forward
basis. Our total employee count is now approximately 500, down
from 595 at the beginning of the
year.
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These savings will begin to be realized in the third
quarter, and will position us for better performance, even with the
continuation of a less than ideal market environment. We
continue to maintain a strong and liquid balance sheet. As of
June 30th, shareholders equity totaled $288 million, with over $187
million held in cash, and approximately $60 million of merchant
investments that we expect will yield positive returns and additional
liquidity during coming periods.
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At the end of the quarter, we had a book value per
share of $4.57, and we continue to have our deferred tax assets fully
reserved. As we announced yesterday, our board of directors has
authorized the company to buy back up to five million shares of the
company's common stock.
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Despite the loss this quarter, several factors give
us reason to be cautiously optimistic about the outlook for the coming
quarters. With 12 months of core profitability and a leaner
cost structure, we believe we have meaningfully improved our earnings
profile even at current revenue levels. Further, while the
conditions for middle market capital raising remain tentative, our banking
pipeline includes an encouraging number of recently won mandates ready for
execution as soon as market conditions
allow.
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Lastly, our talented team of professionals has
demonstrated incredible resilience and professionalism as we work through
the follow on impacts of the recession and undertake difficult cost
cutting measures. While we feel very good about how the company
is positioned, we have to assume that headwinds will continue, and the
picture for the rest of this year will remain decidedly
choppy.
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Our focus continues to be on execution, particularly
with regard to generating revenue and growing client
relationships. As I've previously said, and as evidenced again
in the second quarter, our progress will not likely be reflected in
straight line revenue growth. Our conservative posture in this
environment has preserved our solid balance sheet with strong liquidity,
and will allow us to continue to prudently invest in our future and
position FBR to respond quickly to client needs and market
opportunities.
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We will remain on strategy, building on our core
strengths to improve our franchise, expanding market share with a focus on
execution, and continuing to make adjustments as necessary to reflect the
environment in which we operate.
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We'd be happy to take
questions.
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Operator:
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Ladies and gentlemen, if you have a question at this
time, please press star followed by the number one key on your touch-tone
telephone. If your question has been answered, or if you decide
to remove yourself from the queue, you may press the pound
key. Once again, if anyone does have a question, you may press
star and then one at this time.
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One moment for our first
question.
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Our first question comes from the line of Eric
Bertrand of Barclays Capital.
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Eric Bertrand:
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Hey, guys. On the capital raising line, the Air Lease
deal during the quarter, you said that it was a $1.2 billion
deal. The company says in its own press release that it was 1.3
billion, and there was also a $2 billion committed debt
deal. Can you confirm a couple of details here about the size,
the revenue of that deal, whether you're involved in the debt deal,
whether it was in the second quarter? Did you invest in
ALC? Just trying to reconcile what seemingly should have been a
$50 million at least revenue item with seemingly about 30
million.
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Rick Hendrix:
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Sure. So it is in the second quarter, the
actual size of the deal is 1.25 billion. It was structured as
two side-by-side private placements, one of which was a billion dollars,
and one of which was 250. The 250 was really provided by two
anchor investors, there was not a fee to the placement agent, FBR on that
component of it. And there was a rebate structured into the
placement fee that's disclosed in the private placement
memorandum. So it is a little bit lower fee than we would
normally see, even on the billion dollar component, and it had a lot to do
with how the transaction came in, it's consistent with what we've done in
sort of prior similar circumstances, and similar to what we would do in
the future in similar circumstance.
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The debt component – we were not involved with, but
it was also placed and distributed concurrent with the equity
offering.
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Eric Bertrand:
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OK, that helps clear it up. And then you
said you have a good pipeline, I think was the prepared remarks
words. Can you help us you know were there any transactions in
July? Are you marketing or preparing to marketing significant
transactions in the third quarter, not looking for obviously any specific
transactions given the private nature of the deals? But help us
out in understanding you know a little bit more color on the
pipeline.
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Rick Hendrix:
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Sure. We actually have several
transactions in the market right now, so we are marketing in July, and
will be in August several opportunities. So you know when we
talk about you know a good pipeline, and a broadened pipeline, that is
accurate, and as you know we have a relatively lumpy business, quite a
lumpy business in many quarters. But we do have activity sort
of in all of our industry groups currently, we have a number of
transactions on the road, and like we said, we feel good about the
pipeline, obviously all of us in this industry are you know going to be
subject to how the market performs. But it's a broader
pipeline, and we're actually more active in the market with multiple
transactions now than we have been in quite a
while.
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Eric Bertrand:
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OK. So would it be fair to characterize
the aggregate pipeline that's actually on the road right now, expected to
complete during the third quarter? Would that result in higher
or lower capital raising revenues
sequentially?
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Rick Hendrix:
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That's a tough question, Eric, I mean if every single
thing that you know we believe we will put in the market, or to execute,
and execute sort of I'll say optimally, it would be more revenue than in
the second quarter. But you know there are uncertainties with
all of these transactions. I think there are also going to be
transactions that we'll market that are not in the front end of the queue
right this minute. And so when we look at sort of signed
engagement letters, and the likelihood of those closing, and then we look
at other transactions where we don’t even have a signed engagement letter
in some cases, there's a higher likelihood that those will close than the
engaged backlog.
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So there's a lot of uncertainty, and it's a lumpy
business. But if everything that is in the market currently,
and that we expect to put in the third quarter were to close, and execute
optimally, it would be more revenue than the second
quarter.
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Eric Bertrand:
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That's excellent color, thank you very
much. On the trading business, can you help us out with the
trading portion, not necessarily commissions that were you know up
sequentially, and that – it definitely makes a lot of sense given the
stronger volumes in the market. But the principal transaction
business is down by two-thirds sequentially. You have a you
know per your own description, capital light business, and seemingly the
footprints you know should have been expanding, but your balance sheet
actually contracted during the quarter. Can you help us
understand some of the individual business lines inside there you know
convertibles, credit trading, did any of them actually post individual
losses? Trying to get a handle of
that.
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Rick Hendrix:
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Sure. So equities trading was up about
five or six percent quarter-over-quarter. The non-equities
trading businesses had a sort of net revenue of negative a half million
dollars in the quarter, and that is just reflective of the volatility as
we talked about. So you know activity in commissions were sort
of strong, and sequentially in line with where we would have expected, but
we took negative marks on the desk. And we did take capital
down sort of into that period. So I think in the aggregate, we
feel pretty good about how those businesses performed, and in particular
we feel good relative to what we know is going on in some of our best of
peer firms. But the net of that volatility was that the
non-equity businesses were essentially flat, down actually a little bit
for the second quarter.
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Eric Bertrand:
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OK, I will hop back in the queue and let other people
ask questions. I'll be back
though.
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Operator:
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Thank you, sir. Our next question comes
from the line of Devin Ryan of Sandler
O'Neill.
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Devin Ryan:
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Good morning,
Rick.
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Rick Hendrix:
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Good morning,
Devin.
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Devin Ryan:
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You mentioned the back office, Europe and banking as
areas where the headcount reductions came from, but can you just give a
little bit more detail on maybe the weightings of each, and just how we
should think about kind of headcount going
forward?
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Rick Hendrix:
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Sure. It was centered in those three
areas, but we actually had some reductions in virtually all parts of the
business. You know it's certainly difficult to take headcount
down ever by 16 percent, and I don’t think you can do it by just focusing
on a handful of areas. So they were concentrated in banking,
London, and in back office, but every piece of the business was
touched. In back office, sort of the biggest component was our
technology staff, which was reduced by about a third. London
was reduced by about 60 percent, and based on those reductions, and what
we expect to be sort of even the adjusted revenue going forward, we think
that London will be a positive contributor on a go forward basis, so that
was a very important step. And banking was about a 15 percent
reduction overall, which is sort of 23, 24
people.
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Devin Ryan:
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And were those generally senior level people, or
lower level people, or just give some color there, it would be
helpful.
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Rick Hendrix:
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Yes, it was more weighted towards senior
people. I mean the impact obviously is greater from a cost
reduction standpoint targeting senior people. And that's the
most difficult part of a reduction for a company like ours, because there
is some option value frankly to a senior banker. And it's not
certainly a science to determine what the near term revenues are going to
be from each banker. But the focus was sort of within the
senior ranks as opposed to junior and mid
level.
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Devin Ryan:
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OK, got you. And just thinking about the
expense reductions, what's the timing going to look like in terms of them
flowing through? And then you know with the reductions, maybe
help us think about what a good quarterly non-compensation run rate would
be, assuming maybe similar professional service expenses you know at this
quarter's level.
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Brad Wright:
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Yes, Devin, this is Brad. You know we
quote a $20 million annual savings, I think better than half of that will
be immediate. So we should start seeing probably call it a $12
million run rate annually starting right into the third
quarter. Some of the other actions were you know real estate
related, or IT related, and will kick in more along the fourth quarter,
and fully by the beginning of 2011.
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I'm sorry, what was the second half of your
question?
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Devin Ryan:
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I'm just trying to get a sense of what the
non-compensation run rate would be just as a result of the reductions,
maybe just once they're all in place, what you know non-comp run rate
would be with similar professional expenses, assuming the professional
expenses remain a little bit elevated, because you're getting deals
done.
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Brad Wright:
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Right. So I think that of that 20 million
reduction, you should be thinking about probably five to six million of
that being non-comp.
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Devin Ryan:
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Got it, OK. And then the severance expense
this quarter, is that all the severance expense related to this reduction,
or is there going to be some additional cleanup next
quarter?
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Brad Wright:
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No, we took it all in the second
quarter.
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Devin Ryan:
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Got it. And in terms of the five million
share repurchase, how should we think about you know how aggressive you
guys would like to be, particularly with the stock trading as it has, and
at these levels you know just want to think about your thoughts in terms
of repurchasing your stock here.
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Rick Hendrix:
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Sure. Given where the stock's trading,
there's real value there, and we think that being able to buy back stock
below book is something that's going to be additive for shareholders, and
we want to have the flexibility to do that. Having said that, I
don’t expect us to use the entire authorization in a very short timeframe,
we want to make sure that we're always in position to be opportunistic,
and we want to make sure that we're maximizing return on all of our
capital.
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But as I said in the remarks you know we're
continuing to execute against the strategy that we laid out, and we think
that we have tremendous return opportunities as we build the business as
well. So it's important to have the flexibility, we had taken
our previous share authorizations down to the point where we only had
about 200,000 shares remaining authorized, and this puts us in a position
to continue to be opportunistic as we go forward, and looking at where the
stock's trading.
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Devin Ryan:
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OK, got you. And then on the deferred tax
asset allowance, can you remind us what the current size of that
is? And then whether you have an updated estimate in terms of
how much you know might come back on once you return to
profitability?
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Brad Wright:
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Devin, the total deferral is between 70 and $80
million. And, you know so if you just look at that on a per
share basis you know you're talking about nearly $1.20 a share that's not
on the balance sheet. But the timing of when that comes back is
heavily dependent on you know when we start generating consistent
earnings.
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Some of the things that are in there, if you think of
it in three pieces, it's about a third of U.K. NOLs, it's about a third of
timing differences mostly related to stock compensation, and then it's
another third of capital loss carry forwards. So whether the
deferred asset comes back on the balance sheet or not, as we actually
realize the reversal of the timing differences, or as we realize capital
gains, we'll be able to take the benefit of
that.
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You know I would have to say, I think that the U.K.
piece is probably the most uncertain in terms of timing, but you know
absent putting them back on the balance sheet, we'll start taking the
benefit of those as we realize reversals of timing and capital
gains.
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Devin Ryan:
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Got you. So in just thinking about the tax
rate, I guess, the follow-up to that is, is it because of the – my
understanding is that the tax rate is very volatile, one, because you
don’t have the deferred tax asset currently to help
results. And then secondly, because of these related timing
differences. So I guess can you just maybe explain a little bit
more in terms of the volatility that we've seen the last couple of
quarters as how we should think about it again, I think that would be
helpful.
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Brad Wright:
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Right, it's very difficult to peg an effective rate,
because essentially we forecast to the end of the year, and then take an
estimate of our actual tax liability based on that forecast, and then
calculate a year-to-date effective tax rate based on tax versus
book.
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So particularly when our book results are you know
forecasted around breakeven, then depending on which side of breakeven
you're on, and then based on timing differences, your tax rate can be very
odd. And so you know right now, our tax rate is projected to be
very low, and with the reversal that we took this quarter, we would be in
a position at year end to have a small tax benefit due to some carry
backs. But you know I would say absent big changes in either
direction that our net tax provision or benefit will be very small from
here to the end of the year.
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Devin Ryan:
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OK, got you. So I'm thinking back clearly,
does the valuation of losses, is that increasing – did that increase this
quarter as a result of the timing differences I guess related to the stock
based comp?
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Brad Wright:
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Yes.
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Devin Ryan:
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OK, it did, OK, great. That's it, thanks a
lot.
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Rick Hendrix:
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Great, thanks,
Devin.
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Operator:
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Thank you. And our next question comes
from the line of Mark Patterson of NWQ Investment
Management.
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Mark Patterson:
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Oh, hey there.
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Rick Hendrix:
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Good morning,
Mark.
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Mark Patterson:
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Good morning. I guess a lot of people have
already asked, maybe I'll just a little bit of follow-up. On
the revenue line, you kind of went through the Air Lease
deal. So there was no green shoes associated with
that?
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Rick Hendrix:
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There was, and it was completed in the
quarter. So the base deal was 810 million, I believe, and there
was a larger than normal green shoe that we fully sold through, and ended
up guiding to the billion dollar base
deal.
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Mark Patterson:
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OK, I got you. And then you guys did
another transaction in the bank land in the quarter, and I know that had
kind of a unique you know revenue setup for yourselves. You
were paid a point on the capital raised with the contingent for when that
bank gets the capital put to work to get the rest of the
fee?
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Rick Hendrix:
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Correct. So we completed a half a billion
dollar capital raise for a management team to pursue bank
acquisitions. The half a billion dollars, 50 million of it, or
10 percent from each investor, was funded. We were paid one
percent on the 50 million, which essentially offset expenses, so the half
million dollars of revenue in the
quarter.
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Mark Patterson:
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OK.
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Rick Hendrix:
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And when they actually draw the rest of the capital,
we'll be paid seven points in cash on the entire drawn amount, including
the 50 million that's already funded. So as they have success
deploying the capital, we will recognize what should be pretty
significant.
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Mark Patterson:
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OK, so you got 30 to 35 million contingent coming
when they get that capital put to work, they get some big deals
done. OK.
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Rick Hendrix:
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Correct.
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Mark Patterson:
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With respect to the – I guess you guys – looking at
the breakeven, what you've done with your – with your fixed costs, so the
way you're looking at this is you had 42 and change million dollars of
core fixed costs that you could bring down starting in 2011 when we get
fully run rate with this 20 million, you could bring that down to 37
roughly is how you're looking at
that?
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Brad Wright:
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Yes, that sounds right,
Mark.
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Mark Patterson:
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OK, so 150 million of core fixed costs, and you ran
it – a revenue – well I guess you've run at a revenue level here, which is
comparable, if not weaker than where you've been over the last number of
quarters. So I guess the way you're looking at this now is
you've got ability to be pretty breakeven at this revenue level, so it
seems like the down side of kind of book value deterioration from here
might be very limited.
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Rick Hendrix:
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Certainly at these revenue levels, it should be over
in terms of deterioration. So that's what we've tried to
structure for. You know the reality is, Mark, that we entered
the downturn with too high a fixed cost base, and you know we are
continuing to work it down. This was a big step, and even if
revenues were to rebound to higher levels, we're going to continue to keep
pressure on costs, there's more to come out, but some of it comes out in
step functions.
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Mark Patterson:
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I guess I'm – Rick, I'm just thinking that –
obviously it's been a very difficult environment, but if you brought your
– if you brought the company to a place where you have a decent reasonable
likelihood of breakeven on – under this kind of a revenue scenario that we
saw this quarter, then if you've got 180 – $190 million of cash out there,
I know – I know that there's a cash need for the business, and you want to
have that, and you want to have your flexibility. But it would
seem to me like if your stock's trading at you know 60 to 65 percent of
book, or something like that, that you would want to be more aggressive
with 15 to $20 million of buyback
dollars.
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Rick Hendrix:
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Well look, that's why we put the authorization in
place. So we didn’t do it as just a headline, and we have used
I think we've repurchased about two and a half million shares, or just
below two and a half million shares year-to-date, and had used up our
entire authorization. And so we always are going to buy back
share at a minimum to offset employee shares that get created through
deferred comp, but this authorization will allow us to do more than
that. And while I've been answering – I think it was Devin's
question I don’t want a telegraph that we're going to run out and use it
in a week, it's not just a
headline.
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Mark Patterson:
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Right, OK. Thanks a
lot.
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Rick Hendrix:
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Yes.
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Operator:
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Thank you. And our next question is a
follow-up from the line of Eric Bertrand of
Barclays.
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Eric Bertrand:
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Hey, guys. Can you give us a update on
your prime brokerage business? You had recently gotten started
there. How are you doing with signing up customers, and getting
balances going, that sort of stuff?
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Brad Wright:
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Yes, Eric, we continue to make good progress
there. I think that we see kind of our client number doubling
every quarter, and from a very small base. And revenues coming
along with that, it's just a business that's going to be a slower build
than some of the other trading businesses, because it's kind of a
sequential one customer after another type of
build.
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But we've got – in terms of – if you think of it as a
pipeline, and we've got several dozen very good leads with verbal mandates
and on boarding of 10 to 12 clients
currently.
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Eric Bertrand:
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OK. On the investment portfolio, there was
the zero-ish revenue in the investment income line during the
quarter. Where do you think the portfolio would be marked if it
were mark to market you know particularly the Ellington and
NBH?
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Rick Hendrix:
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In both those cases, if we were going to truly mark
to market, we'd be certainly at higher levels. I think in terms
of Ellington, I don’t know off the top of my head what the last trade was
there, but their book value is in the neighborhood of 24.50 or $25, and
we're carrying it at 15. So you know there's a pretty
meaningful potential gain baked into that
position.
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And NBH you know we purchased net of the underwriting
discount based on what our recent trades have gone off, we would have a
small gain there too. And you know our belief is that that will
be more appropriately and accurately valued as they get regulatory
approval for the acquisition they announced out in Kansas
City. And so we actually – we feel like the merchant portfolio
is very defensively marked overall, and should provide earnings as we go
forward. Which is important, it's not an inconsequential part
of our investable capital, and as you point out, there's essentially no
earnings off of the capital in the quarter. And while it may
not show up in a really smooth way, we do think that that portfolio is
going to be a positive contributor as we go
forward.
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Eric Bertrand:
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Philosophically, can you help us understand why it
doesn’t get marked like this? You know seemingly you expect to
have gains in this portfolio, and you have a reasonable basis as
such. Why not recognize the gain in the
P&L?
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Brad Wright:
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Eric, just from a GAAP accounting perspective, we
mark all of the merchant portfolio on a cost basis. So it's
just our accounting policy, and it's private. So that it just
requires that we book them on that
basis.
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Rick Hendrix:
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Eric, I'm sorry, just to – you asked earlier, and I
didn’t answer, I just forgot, getting through the answer, but whether or
not we invested in Air Lease, we did invest $5 million in Air
Lease.
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Eric Bertrand:
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Great, that was actually my next follow
up. Five million Air Lease. Got it,
OK. Asset management business, you mentioned in the prepared
remarks that you had some opportunities that you were
pursuing. Could you provide a little more color there, are you
looking to buy anything, are you looking to you know merge with anything,
sell the business? What's the
story?
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Rick Hendrix:
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Well as we've stated in the past, we do want to grow
the asset management business both organically and potentially through
acquisition. We have spent a considerable amount of time on the
acquisition front over the last nine months, and rather than telegraph
what may or may not happen, I would just say we're continuing to work on
potentially growing through acquisition, and if we find the right
opportunity, and we get sort of all the way to the finish line through
diligence, and so forth, but we think that could be a good opportunity for
the business.
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Eric Bertrand:
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What are the sticking points to getting deals
done?
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Rick Hendrix:
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You know they're like all deals, right? I
mean valuation is always an issue, making sure that you’ve got the right
fit, both from a business model perspective, and from a human capital
perspective is important. And again, we spent considerable time
there. I don’t want to suggest anybody that we are right on the
precipice of announcing anything, because we're not. But it
continues to be something that we think could be an important contributor
to the business, and a good use of our capital, and when we find the right
opportunity we'd like to believe that we're going to be able to get
something done.
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Eric Bertrand:
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OK, we'll look forward to
that. Compensation you know year-to-date, you're at an 83
percent ratio, which is on the – on the high side. Can you help
break out that number a little bit for us? How much of that is
incentive comp? I see accrued comp on the balance sheet that
grew 16 million during the quarter, is that a fair
proxy?
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Brad Wright:
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Yes, that's a fair proxy in terms of pooled comp,
Eric. I think if you were to pull the severance number out in
this quarter, we ran at about 67 and a half, and I think for the full
year, about 77. So on a pro forma basis following these
reductions that Rick has explained, this quarter would have been right on
60 percent comp to revenue.
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Rick Hendrix:
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And the other thing I would say, Eric, is that the 16
million that is sort of accrued bonuses that goes onto the balance sheet,
that's not the entire variable comp component, because in our brokerage
business, we continue to pay commissions to our sales position – sales
traders, position traders and institutional
salespeople.
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Eric Bertrand:
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OK, maybe I got the numbers crossed
here. So second quarter compensation and net revenue, excluding
the severance, was 60 or 67 and a
half?
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Brad Wright:
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Sixty seven and a half, and on a pro forma basis,
60.
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Eric Bertrand:
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OK, so pro forma for the reduction subsequent to the
end of the quarter?
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Brad Wright:
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Yes.
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Eric Bertrand:
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OK. So that gets to the actual
restructuring and the layoff. You know the text of the release,
and your prepared remarks says that your headcount is about 500, though
the table in the release actually says 582. So were these
reductions subsequent to the end of the
quarter?
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Brad Wright:
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It was in the week following the end of the quarter,
yes.
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Eric Bertrand:
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OK. So therefore there should be severance
and related expenses in the third
quarter?
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Brad Wright:
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No, the plan was in place, and the actual people
identified, which allows us to accrue it at the end of the
quarter.
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Eric Bertrand:
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I can look back through the transcript, but did you
disclose to us what the actual severance expense was during the second
quarter?
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Brad Wright:
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Yes, it's in the core table, it's about 4.2
million.
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Eric Bertrand:
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OK, thank you. We talked about tax and the
repurchase. Did you buy back any stock during the
quarter? I saw the authorization at the end of the first
quarter was 1.3, and then you just said it was basically zero or
.2. So did you buy back a million – a million shares during the
quarter?
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Brad Wright:
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No, the actual numbers, Eric, is about 600,000 shares
repurchased during the quarter, which left us about 600
remaining.
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Eric Bertrand:
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OK. So then this five million, is that on
top of the 600, or are you filling up to five million authorization
total?
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Brad Wright:
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No, it's in addition
to.
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Eric Bertrand:
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OK, just clarifying the language. And
that's it for me. Thank you,
guys.
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Rick Hendrix:
|
Great, thanks,
Eric.
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Operator:
|
Thank you. And our next question comes
from the line of Adam Wyden of ADW
Capital.
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Adam Wyden:
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Hey, guys, thanks. Just quick
question. It's my understanding that you generally make most of
your money from the 144A placement business, and the majority of the cost
reductions, I'm going to assume the banker side come from part of the
M&A advisory side. So I just wanted to kind of you know
understand you know once the pipeline comes back for 144A, and follow-ons,
equity markets come back, the $20 million should kind of flow through, so
this is kind of a depressed equity business. You fired you know
the fat in the M&A business that was never truly phenomenal, and then
when that business comes back, we should kind of think about this as kind
of $20 million of incremental
profit.
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But you talked about option value, but I mean is
there really a lot of lost business in here, or is this really kind of
making it such that the margins are higher when 144As and equities come
back? You know how should we think about
that?
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And then how should we think about your operating
strategy going forward? You know, are you going to grow your
debt capital markets business? It's kind of a shame you didn’t
get any of that $2 billion on the Air Lease deal. You know how
should we think about kind of leveraging your good business, and kind of
you know getting rid of your bad businesses? And how should we
think about that on the profit
side?
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Rick Hendrix:
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Well I guess a couple of things,
Adam. Number one, that I would not characterize the reductions
in banking as focused in M&A or advisory, it was as I said, targeted
more at senior level bankers than mid or junior level
bankers. But it wasn't particularly targeted at M&A or
advisory. We do have a particular expertise in addition to our
normal capital markets franchise in these big private
placements. Whether we make more money with those, or in
another part of the business, it all just comes down to volume, and you
know which transactions we're
executing.
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But we do think that the $20 million will flow
through, and this has been a challenging environment, continues to
be. I think one of the points we've tried to make to people is
that even in a challenging environment, we've actually completed three of
the largest transactions in the company's history. So from a
distribution standpoint the company is probably from a capability
perspective in a better place than it's ever been. But we need
to be more profitable at those revenue levels, and that's really what
these steps are all about.
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Adam Wyden:
|
OK. So what about growing the debt capital
markets business income, leveraging the existing platform that works
well? I mean how should we think about the pipeline, and how
should we think about like leveraging your existing platforms and kind of
growing those kind of horizontally?
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Rick Hendrix:
|
Well we have added the non-equity trading businesses
over the course of the last couple of years really, because we added the
convertible business about two years ago at this point. We have
also added a debt capital markets business, we actually have active
mandates in that business today, and I do think that we're going to see
that become a meaningful contributor in the banking
line.
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In terms of you mentioned the Air Lease debt
component that was really a bank deal that was syndicated by one of the
bulk bracket banks. And while it would have been great to be
involved with that you know we're not really in the loan syndication
business in a way that would allow us to complete a $2 billion loan
syndication. So I think our focus on the equity traunch, and
the other bank's focus on the bank loan piece was appropriate in that
case.
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Having said that we do expect debt capital markets to
be a contributor as we go forward, and as I said, we are working on active
mandates there.
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Adam Wyden:
|
Like on the Air Lease deal, you quoted like $30
million. Well historically you make like six to seven percent
IPO fee on the equity. So my understanding, due to about six or
$7 million of other fees from other placement offerings, so $30 million on
1.1 billion is like two and a half percent. How should we think
about like the future fee of 144As and follow-ons going
forward? Is this like an exception, a rebate, I mean more
competitive? How should we think about
that?
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Rick Hendrix:
|
Yes, it wasn't really driven by
competition. It was really driven by the circumstances of how
that transaction came together, and how that management team had been
working with some other advisors along the way prior to engaging us to
raise the capital. As I said, it's similar to what we've done
in past similar circumstances Mark Patterson asked a question a couple of
minutes ago about the half a billion dollar bank deal that we did where
we're going to recognize revenue going forward. That's seven
points all cash that will be coming as that company is
successful.
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So the actual fee on Air Lease for the capital that
was not already in place in some ways was five and a quarter percent,
which is the right fee level on that size transaction, and I wouldn’t
expect to see fees lower than that on billion dollar deals as we go
forward.
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Adam Wyden:
|
So it's kind of a tiered structure for certain size
of deals? So like under 100 million, six to seven percent; 200
to 500 million, five percent; 500 million to a billion, three and a half
percent?
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Rick Hendrix:
|
No, we're not going to do going to do a 144A for
three and a half percent at a billion dollars, because that was a five and
a quarter point deal. So if you think about it, NBH was a five point deal,
North America was a five point deal, this was a five and a quarter point
deal. But we did have a rebate, again, because of the
circumstances through which the transaction came to FBR. It is
similar to what we've done in the past in terms of rebates that allows the
issuer to also compensate other firms that had been advising them up until
the point of the transaction.
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Adam Wyden:
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Oh, so like a finder's fee, is – I got it now, I
understand now. Thank you, no more questions for
me.
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Rick Hendrix:
|
Great, thanks,
Adam.
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Adam Wyden:
|
All right.
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Operator:
|
Thank you, sir. And I show no further
questions in queue at the moment.
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|
Once again, if you do have a question, please press
star and then one at this time.
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Rick Hendrix:
|
Great, if there are no other questions, I want to
thank everybody for joining us, and we look forward to talking to you
coming up in the third quarter.
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Operator:
|
Ladies and gentlemen, thank you for participating in
today's conference. This does conclude the program, you may now
disconnect. Everyone have a great
day.
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END
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