U.S. Markets closed

Edited Transcript of JMP.N earnings conference call or presentation 25-Jul-19 2:00pm GMT

Q2 2019 JMP Group LLC Earnings Call

SAN FRANCISCO Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of JMP Group LLC earnings conference call or presentation Thursday, July 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew P. Palmer

JMP Group LLC - Director of IR

* Joseph Andrew Jolson

JMP Group LLC - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Alexander Peter Paris

Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to JMP Group's Second Quarter 2019 Earnings Conference Call.

Please note that today's call is being recorded. (Operator Instructions)

I will now turn the call over to Andrew Palmer, the company's Head of Investor Relations. You may begin.

--------------------------------------------------------------------------------

Andrew P. Palmer, JMP Group LLC - Director of IR [2]

--------------------------------------------------------------------------------

Good morning.

On the line with me today are Joe Jolson, JMP Group's Chairman and Chief Executive Officer; and Ray Jackson, the company's Chief Financial Officer. We're joined by Carter Mack, President of JMP Group; and Mark Lehmann, President of JMP Securities.

Before we begin, please note that some of this morning's comments may contain forward-looking statements about future events that are out of JMP's control. Actual results may differ materially from those indicated or implied. For a discussion of the uncertainties that could affect the company's future performance, please review the risk factors detailed in our most recent 10-K.

With that, I'll turn things over to JMP's Chairman and CEO, Joe Jolson.

--------------------------------------------------------------------------------

Joseph Andrew Jolson, JMP Group LLC - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thanks, Andrew.

We had a disappointing second quarter due to lower-than-expected investment banking revenues. However, the month of June was more in line with our expectations, and given our current transaction pipeline, we're cautiously optimistic about our prospects for a strong second half of 2019.

We continue to invest a material percentage of our earnings to grow our advisory business organically, hiring 3 M&A-focused managing directors so far this year. We've also made good progress in simplifying our balance sheet by reducing our investment portfolio and retiring long-term debt. In the second quarter, we sold our senior equity in our 2 most recent collateralized loan obligations at relatively attractive prices, using the proceeds to help finance a self-tender offer for 1.8 million or about 9% of our shares in June and the retirement of $11 million of our 8% senior notes in July.

Given that we are halfway through the year, I want to provide an update on our 2019 plans. From a financial perspective, we've gotten off to a fairly slow start at JMP Securities with capital market revenues, which include our net brokerage revenues, down 39% year-over-year to $28.3 million for the first half. Much of the drop-off can be attributed to an especially weak first quarter, which was affected by the partial government shutdown and the closure of the SEC. In the second quarter, capital market revenues increased 50% sequentially and results for the month of June returned to expected levels.

The underlying strength in the U.S. equity market also bodes well for our backlog of potential IPOs in the technology and health care sectors. In the second quarter, we participated in 6 IPOs versus just 2 in the first quarter.

Our strategic advisory business should also play a bigger role in the strong second half potential performance. Our second quarter advisory revenues of $5.4 million outpaced those from the prior quarter and the year ago quarter but represented just 3 closed deals, while we have a record number of mandates in our pipeline. We continue to focus on increasing the revenue and earnings power of our M&A practice, hiring 3 more senior bankers since March, all with long track records of success in the area. In April, we added a managing director to our life sciences group, and in June and July, we added 2 managing directors with Internet and software experience. While we traditionally have been strong in both health care and technology M&A, we've made it a strategic imperative to deepen our capabilities and expand our market share in this highly competitive but high-margin business.

We know it's a zero-sum game for us, but we believe we can continue to gain market share by establishing JMP Securities as a more recognizable brand in the middle market and a more sought-after strategic adviser to growth companies. We were also carefully monitoring the recent wave of industry consolidation and evaluating growth opportunities that could emerge from it, including the prospects of adding another industry vertical to our mix. The recent acquisitions of 2 of our full-service competitors, Leerink Partners late last year and Sandler O'Neill more recently, at attractive revenue and tangible book value multiples have not gone unnoticed by us, though the stock market has exhibited an apparent lack of interest.

Given our strategic decision in March of this year to sell a controlling interest in our corporate credit platform in order to facilitate more rapid growth with capital-intensive business, we believe that we will need less than $100 million of capital longer term to execute on our growth plans of our other businesses. And some of that funding will likely take the form of debt as it -- is now. Currently, we have $150 million of long-term debt and equity capital. Consequently, we will continue to evaluate the return of capital to our shareholders as well as the retirement of more long-term debt as we harvest our investment portfolio going forward.

Turning to our asset management business. The first half of the year modestly exceeded our operating plan as we successfully executed on our strategic goal of materially simplifying the JMP story, spinning out both hedge fund Harvest Small Cap Partners and our corporate credit business. Looking ahead, we are focused on growing our existing fund strategies with [extra effort] focused on those that have -- that are synergistic with the intellectual capital across the broader JMP platform, namely venture capital, real estate and private debt and equity capital. At the end of the second quarter, these strategies totaled about $1.8 billion, which includes our 45% ownership still of the corporate credit business, now called Medalist, compared to $1.7 billion at the end of 2018. We are currently in the market raising money for JMP Realty Partners II and expect to officially launch Harvest Growth Capital III later this quarter. We are targeting total subscriptions of somewhere between 75 million to 100 million for each of these 2 funds in the next year.

Our platform costs have been rationalized such that revenue growth should require a little in the way of additional resources, resulting in improving profitability if we meet our growth objectives. We are also evaluating partnership opportunities with a few venture capital firms, which could further enhance the development of the strategic area for JMP.

In summary, we anticipate a return to more normal levels of profitability at JMP Securities in the second half of this year as well as continuing progress across our remaining fund strategies, which would support more consistent and growing contributions from asset management in the future. As mentioned earlier, we also made progress towards our longer-term capital goals by decreasing our investment in CLO securities and accelerating the repurchase of our shares in the second quarter. We also initiated the partial redemption of certain outstanding senior notes, which took place in July. In May, we sold our senior equity in 2 CLOs now managed by Medalist Partners, reducing our exposure in the asset class and using the proceeds to help finance a tender offer for our shares and the reduction of our long-term debt.

Just a quick recap of some details on this: We self-tendered for 3 million shares in May and ended up repurchasing 1.8 million of them at $3.95. When counting other routine buybacks during the period, we repurchased almost 2 million shares in the second quarter at a total cost of $7.8 million. The tender offer was immediately accretive, adding $0.06 a share to adjusted book value, though this effect was more than offset by the combination of the operating loss for the quarter and a negative fair value adjustment to the junior equity we continue to own in our 2 most recent CLOs, which cost us about $0.11 a share in the quarter.

In June, we announced that on July 18, we would redeem $11 million of our 8% senior notes that come through in 2023. With the transaction now completed, we are left with $75 million face value of notes versus nearly $97 million at the time of issuance, $50 million of which are 7.25% coupon due in 2027 and with the remaining $25 million still at the 8% coupon due in 3.5 years. Our desire is to reduce our long-term debt to less than $50 million over the next few years if we are successful in opportunistically harvesting our existing investment portfolio currently at about $120 million or 51% of our total assets. And these monies are invested for a return that shows up in our principal activities and is primarily in our fund strategies.

As we have previously discussed at length, we elected to be taxed as a C-corp at the start of this year, giving us the opportunity to retain earnings while also using some of our capital to invest in growth and to repay long-term debt. We plan to use at least $5 million of cash earnings each year to redeem these outstanding senior notes. Nevertheless, we remain committed to providing shareholders with a regular quarterly dividend. Our first quarter payout of $0.04 a share was based on our best guess of about 50% of this year's normalized operating earnings. We'll announce our second quarter dividend in the next week.

As always, I want to thank our employees and independent directors for their hard work and dedication to our company. I look forward to reporting on our progress in our next earnings call this fall.

Operator, with that, I'd be happy to answer any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Alex Paris from Barrington Research.

--------------------------------------------------------------------------------

Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [2]

--------------------------------------------------------------------------------

I've got a couple of questions. First of all, you've done a lot over the last 6 to 9 months to simplify the story, return capital to shareholders, retire your debt, yet the environment is really tough for both banking and brokerage. What gives you optimism regarding the second half? I think you said that June investment banking was more in line with plan and your pipeline is attractive.

--------------------------------------------------------------------------------

Joseph Andrew Jolson, JMP Group LLC - Chairman & CEO [3]

--------------------------------------------------------------------------------

Well, I think that we have a number of IPOs that -- we did 6 in the first -- or in the second quarter, up from 2. And there are some [more] at that level or higher expected in Q3 assuming market conditions stay like they are right now. So I think -- and we have a higher percentage of economics, I think, in those deals than we did in the second quarter. So I think that's one thing that we're hopeful to happen. If they don't happen in Q3, hopefully, it will happen by year-end. We also -- and I mentioned, in the second quarter, even though we did close to $5.5 million of revenues in the advisory business, it was only 3 deals.

M&A, it's difficult to gauge closings, lots of factors that can push these things out a month or 2. And we have a reasonably good pipeline to close, we think, this quarter and year-end. I think you may remember last year, our record M&A year, was heavily weighted to the second half of the year too. The 4 M&A bankers that we hired last year, for instance, it takes a while to -- we made an investment in hiring those people. It was roughly 20% of our pretax earnings last year as a firm. And it takes a while. They walk away from an engaged pipeline, and it takes 6 to 12 months to rebuild a pipeline on our platform and then to start to close deals.

So the one we hired the most recently has been here a little bit more than a year now. So looking at those 4 people at a vantage, they have a pipeline of engaged transactions that is roughly $10 million. And we're hoping that a chunk, some of that closes by the end of the year. And just those are the kind of things that -- now we've hired 3 more bankers that probably, we're hoping that -- contribute to this year's revenues, but we're not counting on it. But a year from now, maybe by the second quarter of next year, they'll have a similar type of pipeline that can be accretive in the second half of the year. So we have made those investments, and we're hopeful that things are looking like we made for the most part pretty good decisions on hires. And we're looking at building that business, Alex. So hopefully, that gives you some sense of why we think it'll be a stronger second half.

--------------------------------------------------------------------------------

Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [4]

--------------------------------------------------------------------------------

Definitely appreciate that. So if I have the numbers straight here, strategic advisory produced revenue of $10.5 million in the first half, and you said you have engaged transactions on the M&A side of another $10 million that could potentially close in the second half.

--------------------------------------------------------------------------------

Joseph Andrew Jolson, JMP Group LLC - Chairman & CEO [5]

--------------------------------------------------------------------------------

No, no. That's just the 4 people that we hired last year. We -- I don't want to -- we normally don't get into the actual details of that, but our pipeline is quite a bit higher than that.

--------------------------------------------------------------------------------

Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [6]

--------------------------------------------------------------------------------

Got you. Do you think you've got a shot at last year's number, I think you did 22 deals, producing revenue of $33.4 million of strategic advisory, based on your pipeline [and the] market?

--------------------------------------------------------------------------------

Joseph Andrew Jolson, JMP Group LLC - Chairman & CEO [7]

--------------------------------------------------------------------------------

Last year was a record -- thanks. Last year was a record year. I think that our budget for this year was to be in-line or maybe a little better. Obviously, the first half has had less closings than we expected, but we haven't lost any of that pipeline. So we'll see what happens, but I think that we haven't given up the goal of besting last year's number.

--------------------------------------------------------------------------------

Alexander Peter Paris, Barrington Research Associates, Inc., Research Division - Director of Research and Education & Business Services Analyst [8]

--------------------------------------------------------------------------------

Okay. Great. And then, I guess, just one other question, brokerage revenue down 14.5% in the quarter. That appears to be kind of the worst quarterly decline, a year-over-year decline, in some time. In fact, in the first quarter, it was down at a 2% rate or so, 2% or 3%. What are your thoughts regarding the second quarter institutional equities business and then your outlook for the rest of the year?

--------------------------------------------------------------------------------

Joseph Andrew Jolson, JMP Group LLC - Chairman & CEO [9]

--------------------------------------------------------------------------------

It was a tough comparison year-over-year. I think last year's second quarter, if you recall, had a pretty high VIX that occurred. There was a lot of market volatility in the first and second quarter, and I think that just general institutional trading, active trading, was higher. So I think it was a difficult year-over-year comparison just for the compare. And I think that the underlying trend based on kind of normal -- the typical secular decline that's been going on for a while in the industry and the more recent MiFID II impacts that are kind of lapping year 1 now -- so we're continuing as an industry to see negative pressure from that into year 2.

But we would expect for the year, or we did at the beginning of the year, that brokerage revenues might decline in the high single digit to 10% range. So it's still year-to-date in line with that. And it's down 9% year-to-date, but particularly the year-over-year compare was easier in Q1 and harder in Q2. I don't see any more questions. Is the operator on there?

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

There are no further questions. You may proceed.

--------------------------------------------------------------------------------

Joseph Andrew Jolson, JMP Group LLC - Chairman & CEO [11]

--------------------------------------------------------------------------------

Yes. Thank you, guys, for your interest, and we look forward to giving you an update in 3 months.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

This concludes today's conference call. Thank you for your participation. You may now disconnect.