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Gleacher & Company, Inc. (NASDAQ:GLCH)

Q4 2012 Earnings Conference Call

February 15, 2013 08:30 ET

Executives

Thomas Hughes - Chief Executive Officer

John Griff - Chief Operating Officer

Bryan Edmiston - Controller

Analysts

Joel Jeffrey - KBW

Devin Ryan - Sandler O’Neill

Michael Kamen - Private Investor

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2012 Gleacher & Company, Inc. Earnings Conference Call. My name is Theresa and I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

The following presentation contains forward-looking statements. These statements are not historical facts, but instead represent the company’s beliefs or plans regarding future events. The company often, but not always, identifies forward-looking statements by using words or phrases such as anticipate, estimate, plan, target, expect, believe and intend.

The company’s forward-looking statements are based on facts known at the time and estimates and judgments made by the company based on these facts. Forward-looking statements are inherently uncertain and are subject to circumstances outside of the company’s control. The company’s forward-looking statements may turn out to be inaccurate for a variety of reasons including the condition of the securities market generally and demand for the company’s services within those markets. The possibility of localized or global market recession or economic recession and other risks and factors identified in the company’s filing with the SEC.

Of note, the company is implementing a strategic plan designed to improve its operating results, and this plan may not be successful. You are cautioned not to place undue reliance on these forward-looking statements. The company does not undertake to update any of its forward-looking statements. In addition, the presentation contains non-GAAP financial measures. You should refer to the company’s fourth quarter earnings release posted on company’s website at www.gleacher.com for more information about the company’s financial results, including reconciliations of non-GAAP financial measures to the corresponding GAAP numbers.

I would like to turn the call over to Mr. Thomas Hughes, CEO. Please proceed sir.

Thomas Hughes - Chief Executive Officer

Thank you, operator. Good morning everyone. Thank you for joining us today. I have John Griff, COO and Bryan Edmiston, our Controller with us. As usual, the agenda will be I will make some comments about the quarter and we will turn it over to Bryan for some financial – talk about the financial results, and then we will take some questions.

So, let me first start with the conclusion of our formal strategic review. As you know that we entered into a strategic review last year. We hired an advisor. That was a lengthy thorough process. We engaged numerous counterparties. The executive summary of all that is we came to the conclusion that at this moment in time focusing our energy on the strategic plan is going to yield the best long-term results for our shareholders, customers, and employees. So, we are going to be like every other company that has a growth plan. We are going to constantly look at opportunities to fast forward that plan benefiting all of our stakeholders, but it’s a process, not an event and Wall Street has a habit of focusing on events rather than the process.

So, we will have more about that I am sure in the Q&A. So, point number two is we entered at this in previous earnings calls. We have sold ClearPoint. We have sold it to Homeward Residential Holdings, which is a subsidiary of Ocwen Financial. Ocwen, I believe is the largest residential servicer of loans in the country. We are happy for our employees. Our customers are now in the strong hands of a company that has a very strong position in the market. So, we wish them the best, and we believe that in the wind down and the completion of this transaction substantially all of $25 million will be back into Gleacher.

Few other items, we have renewed our share repurchase program to allow us to enter into the market from time-to-time as we deem appropriate. I also want to remind everyone that we have also started the process as a reverse stock split. We will continue that process and that will be put on the slate for our shareholders at our Annual Shareholder Meeting to vote on, so that’s coming up as well. We are in the process of a – we have teed up a cost reduction program which we believe with drive out some meaningful costs over the next couple of quarters. We will give you more update on that as progress is made there.

And let me switch to the market, business model activities within the firm for the quarter. The business model continues to be reaffirmed in the market. The turmoil in the depository institution, bulge bracket firms continues. Jobs across sales trading in investment banking are being shed most recently by Barclays. And that allows us to – the opportunity to continue to build out our business model.

From the production in the fourth quarter first talk about investment banking, one of the highlights in our investment banking activities is that we are ranked number one in M&A in real estate finance, as it relates to REITs. But overall banking had a very nice quarter. We are seeing an immediate impact of Randy Barker who has reintegrated our growth prospects there and as you know we already have a very productive banking team to build from. The credit group also had a good quarter led by Geoff Coley. There has been a fair amount of new issue throughout the year that continued through the fourth quarter and we were able to take the advantage of that in the secondary market.

If there was an area of disappointment that we need to mark its in our mortgage, it’s the transition of our mortgage business from a capital intensive balance sheet intensive activity to one that is focused on analytical content and customer volumes. And we will talk about Rangemark adding to that when we get into Q&A. So, we need some work on that.

And at this point Bryan why don’t you to take over, let’s go through some of the numbers and then we will get into Q&A.

Bryan Edmiston - Controller

Sure. Thank you, Tom. Our fourth quarter operating results reflects certain achievements as well as some setbacks. We generated $50.9 million of revenue with $7.5 million improvement compared to the third quarter and reported a net loss of $11.5 million or $0.10 per share. Revenue improvement resulted principally from our Investment Banking division which generated $12.7 million of revenue, our strongest quarterly performance since 2009.

The fourth quarter performance in Investment Banking resulted in year-over-year revenue improvement for the division. However, our sales and trading businesses particularly our MBS & Rates division suffered from an interruption in revenue generation due to lower market spreads and lower volatilities. The MBS & Rates division generated $6.1 million for the quarter principally our net interest income down 30% from the prior quarter. This quarter-over-quarter decline does include a certain element of seasonality. However, these results were not in line with the expectations and we continued to enhance the division’s potential through selective hiring and further integrating our Rangemark capabilities.

Our credit products division generated $60 million of revenue, which was down 15% from the previous quarter. This decline resulted from the tightening of spreads, partially offset by higher volumes. Year-over-year revenues are higher by $3 million, an improvement of 5%. ClearPoint reported breakeven results for the quarter on the back of $14 million of revenue. We have entered into an agreement to sell substantially all at Clearpoint’s assets to a third party and expect this transaction will close in the first quarter. We estimate a loss of approximately $5 million to be recognized in connection with this disposition. The division will be reclassified as a discontinued operation in the first quarter of 2013.

Our comp to revenue ratio for the fourth quarter was 82%, which was impacted primarily by the company’s decision to pay year end bonuses in the form of cash. And making this determination, the company considered a variety of factors including the dilutive effects of granting stock-based compensation when trading at a significant discount in relation to tangible book value, which is currently up 60%. Compensation also includes $1.2 million of compensation guarantees principally incurred in the MBS & Rates division in connection with the division’s rebuild.

As previously mentioned ClearPoint will be reclassified as a discontinued operation in the first quarter. This division was a beneficial contributor to our compensation ratio. While we continue to target a 60% ratio, it will be meaningfully higher and in excess in 70% when measured based upon current run rate revenues in our remaining businesses post the ClearPoint sale. Our non-compensation expenses were $20.6 million for the fourth quarter and included $700,000 of professional fees incurred in connection with our strategic review. Year-to-date costs incurred were $3 million. Non-compensation expenses excluding these costs improved by approximately $1.5 million and are related to reduce consulting expenses in connection with the company’s asset management initiatives.

The company’s income tax provision was essentially zero for the quarter. As the quarterly operating loss is folded into the company’s NOL with the full valuation allowance provided against it. We did not record a tax benefit on operating loss as well an valuation allowance position. One other matter to note as previously mentioned by Tom the company renewed its stock repurchase program providing us with the ability to repurchase up to 10 million of stock over the course of the year. The company did not repurchase any of its stock during the fourth quarter.

I’ll now turn the call back over to Tom before he will open the call for questions.

Thomas Hughes - Chief Executive Officer

Okay why don’t we go to questions, Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Joel Jeffrey from KBW. Please go ahead.

Joel Jeffrey - KBW

Hi, good morning guys.

Thomas Hughes

Good morning, Joel.

Joel Jeffrey - KBW

Can you go back to the comp ratio can you give us a sense for how big the bonus portion of that was in the quarter?

Thomas Hughes

How large the bonus portion of that was in the quarter?

Joel Jeffrey - KBW

Just trying to see if ex that the bonus impact this quarter if the comp ratio would have been more in line with kind of what had guided to in the past?

Thomas Hughes

Yeah, Joel why don’t we go on to the next question and give me a minute to think through that.

Joel Jeffrey - KBW

Okay great. And then just to make sure I understand in terms of the ClearPoint, so it was about – looks like it was about $53 million in revenues last year and roughly $6 million loss. So, really it looks like the only other impact we’re going to see then is going to be on basically again a higher comp ratio going forward just is that lower comp business is lifted out?

Thomas Hughes

That’s correct.

Joel Jeffrey - KBW

Okay. And can you give us a sense for the levels of origination volumes that ClearPoint did that year?

Thomas Hughes

During 2012, we were looking at operating I mean at breakeven level, so that was roughly $125 million to $150 million a month. That – those origination volumes were scaled back to that level towards the second half of the year, the first half of year was a bit more than that.

Joel Jeffrey - KBW

Okay great. And then just a little bit more can you give us any additional details on what you are kind of thinking about in terms of the costs reduction program you talked a little but I know you’ll give us some updates down the road but just any thoughts on where some of the maybe low hanging fruit might be or is there any low hanging fruit at this point?

Thomas Hughes

I mean, we are looking at a number of different things including excess space, excess occupancy costs that we can get out off. We are looking at excess headcount and other market data services and things like that.

Joel Jeffrey - KBW

Any sense for the potential impact in terms of the amount of costs reductions?

Thomas Hughes

We’re aiming for a $5 million number.

Joel Jeffrey - KBW

Okay, alright. And that’s pretty much I have got. So, thanks for taking the questions.

Operator

Okay, thank you for your question, Joel. The next question comes from the line of Devin Ryan from Sandler O’Neill. Please go ahead.

Devin Ryan - Sandler O’Neill

Hey, good morning guys. How are you doing?

Thomas Hughes

Good morning.

Devin Ryan - Sandler O’Neill

Just following up on the comp question that Joel has had just trying to think about the 60% comp ratio target and just trying to understand kind of what type of environment it would take to get there, where revenues need to be all things equal to be able to get there. And you said that, that’s kind of part one of the question and then I’ll ask another one.

Thomas Hughes

So, let me give the un-scientific answer, then I’ll let Bryan, he is working on try to get something that’s a little bit more scientific. So, Devin you’re right, I mean, we have a revenue issue that we’ve got to – we took a step back last year significantly in one of our businesses. We are still working on the two steps forward on that and that will -- revenues solve a lot of those issues. Having said that, the previous question that was asked about the cash bonuses, in 2013 and going forward, the senior management team is going to be salary plus stock with regard to its compensation, which will lower the comp expense for the senior management team dramatically going forward, and the comp expense will be based upon stock price performance. So, whereas the fourth quarter and Bryan is working on the numbers right now has a bubble on that, that bubble would not be repeated.

Devin Ryan - Sandler O’Neill

Right, got you. And obviously I understand the accounting behind paying more cash versus pushing some of that expense out if you had paid a higher level of stock bonuses, but I guess what I am just trying to get a better feel for is how much of the higher compensation level in the quarter was related to essentially protecting the franchise in what was a top revenue year for you guys and obviously for the industry overall. And it’s still a function of just kind of being under accrued through the first three quarters of the year, but you felt like you kind of when you are doing there. Finally, your computation you have to pay some level to protect that franchise?

Thomas Hughes

Exactly. So, can we come back to you on that, we will work on that, Bryan is working seriously, but it’s a good question, and certainly in the calculus of what we did from a compensation point of view for our senior and key people that played into it, Devin. So, I don’t want to throw a silly number out yet, so let us work on that.

Devin Ryan - Sandler O’Neill

Sure, okay. And in terms of the MBS & Rates business, can you just talk about some of the things that you guys are doing there, you alluded to a little bit in the prepared remarks, but the group that you have in that business today is largely different from what can I tell than the group that started in 2012, so a lot of different people. And I guess a follow-up on that is are you seeing or maybe feeling like some of the people that you brought on to the platform, the newer individuals are having a harder time transitioning to a business like Gleacher’s and maybe a thought and does that partially weighing on kind of that ramp?

Thomas Hughes

Let me say it differently. I think the previous business model consumed a lot more balance sheet. So, a year ago, I am giving you approximate numbers, they don’t hold me too. And we had close to a $5 billion balance sheet we are substantially lower than that. And our business model is not going to be predicated on net interest income as it was before, because the market didn’t really reward us with that even when things were better on the Street, the market never rewarded Gleacher for net interest income. So, we decided that we had to change the model, change the comp program, and we have hired terrific people. We have a great team. There is no doubt about it. And it’s taking a little longer to get the customers, to get customer volumes to where replacing net interest income with PTs, which has a higher value to the shareholder.

And along those lines, let me make a comment about Rangemark, which is a very important key component of that, because the entire company is built around being a content provider, analytical provider to our customers. And as we said in our previous call, Rangemark which by the way was a strategic activity for the company, we brought Rangemark on, because they are going to make us a lot smarter over time, and provide a service to our customers that they don’t have, but that service when you get down to the nitty-gritty detail of loading a significant number of customers’ portfolios on to a system that’s going to run on a very regular basis or (rich-cheap) analysis over tens of thousands of CUSIP numbers on non-agency product.

We have to make sure that the ability to do that has the commercial industrial horsepower. Otherwise, customers will be dissatisfied and we will not be able to get those customers back on board. So, we are almost done building that portal, but we are beta-testing it all the time to make sure it doesn’t breakdown in the process, because it’s going to be a very valuable tool, but like anything else, you typically get one bite at the apple on these things and we don’t want to have a bad customer experience in the event that it gets jammed up because of the volume.

Devin Ryan - Sandler O’Neill

Okay, great. Thanks for that color. And just thinking about the strategic review and the conclusion of it, my sense is that any firm with some type of strategic review ongoing work could result in a sale or some big disruption in the business. You are good or bad customers maybe a little bit more hesitant to do business with you just as that creates uncertainty. And so I just love to get your sense of how much that you feel like impacted business levels if you have had conversations with customers that have said, once we really have some certainty of the outcome then we will be right back you are transacting with you guys. I mean just curious you got a sense of kind of how you think that played out, how the strategic review actually impacted business or maybe your weight on business and then just some color on that?

Thomas Hughes

Yeah. Statistically, I couldn’t give you any numbers supporting one way or the other, but the human nature of the event once you announce a formal strategic process, unfortunately, the Street does look at as an event rather than a process. So, I am sure some people review themselves, okay, let’s see what happens in the event. And to your point, we think now that we are through the formal nature of it, and we have the balance sheet that we have which is the cleanest and simplest balance sheet basically of any broker dealer on the Street and a $175 million of tangible equity that is levered in a very, very slate way that people get that. So, I can’t give you any statistics. I am sure there is some amount of that, but we can’t – I can’t comment on it, because it wasn’t significant enough for us to track.

Devin Ryan - Sandler O’Neill

Okay, that’s fair enough there. And you were obviously halfway through the first quarter already, so why don’t we get any color if you could provide any regarding activity levels year-to-date so far, if anything has changed or it’s kind of more the same. And kind of now we will see where we go from here with the strategic review ending?

Thomas Hughes

Okay. I think I would summarize it by saying banking continues to show great progress under Randy’s leadership and the core team that we have there, so – and building on the momentum that we have had in 2012 on our real estate successes. So, I feel that, that is on its way. I think the credit group is off to a great start. And little more of the same in mortgages, because we are from a Rangemark point of view, I already described that we are not primetime yet, because we are still beta-testing the application of it, which we are confident it’s going to be very successful, but we just want to make sure that first customer experience is going to be very good.

Devin Ryan - Sandler O’Neill

Okay. And any comment on hiring what you guys are doing on the recruiting front right now, how many conversations you are having the areas that you are looking at in just appetite to hire within any of the different businesses?

Thomas Hughes

Sure. So, we are constantly looking at adding to our already terrific pool of people focusing on banking. Randy has done a terrific job in balancing what we have done in an M&A point of view and complementing that with our ability to maximize opportunities in leveraged finance. So, we can build the bridge to our distribution model, same thing in banking as it relates to asset finance across all the asset classes, credit cards, cars, etcetera, we are working on all of those advisory type of signs and trading effort in mortgages. And within mortgages, we continued to look at adding people. So, that’s going on and we have a very substantial footprint in credit, in high yield, and in our high grade effort, but we will selectively try to either upgrade or add to the team as we see that.

Devin Ryan - Sandler O’Neill

Okay, great. And then just lastly, I guess coming back to comp one more time, in terms of thinking about comp accruals or I don’t know if you guys have kind of thought this for ahead. But when we think about 2013, I mean, 2012 ended in any kind of comp ratio had to go up in the fourth quarter partially because of how that the combination of cash versus stock, but also to some degree because you are setting kind of the full year level and then revenues are may be a little bit softer and to protect franchise. So, when we think about 2013, do you feel like it’s more prudent to start the year conservatively and then maybe there isn’t that fourth quarter true-up and could even be a true-down if you will to the extent revenues are better or have you guys kind of thought through that and just from the modeling perspective, I’m trying to think about how you guys might book at accruing comp throughout the year?

Thomas Hughes

At this point in time, I think that’s the fair way to think about it. We would be thinking and when you pull ClearPoint out of the mix that the ratio does increase because and it’s a positive contributor to that ratio. So, in terms of modeling, I would and to be a bit conservative, I would say think about that in the 70s range. Going back to the previous question, I would suggest that there is approximately $7 million of compensation in the fourth quarter when measured against our prior quarterly run rate.

Devin Ryan - Sandler O’Neill

A bonus compensation?

Thomas Hughes

Correct, that’s right.

Devin Ryan - Sandler O’Neill

Okay.

Bryan Edmiston

That’s right.

Devin Ryan - Sandler O’Neill

Okay, great, thanks guys, I appreciate taking all my questions.

Bryan Edmiston

No problem. Thank you.

Operator

Thank you for your question. Your next question is from (indiscernible) Lloyd Capital Management. Go ahead please.

Unidentified Analyst

Hi, guys.

Bryan Edmiston

Good morning.

Unidentified Analyst

Coming this excessively long strategic review, I mean, the tangible book value still fairly liquid at a $1.45, what we had thoughts about not sort of organizing a buyback, you just want to wait to show up the profitability the firm before stepping in and buying you’re your own stock what was the thought around that?

Bryan Edmiston

It’s very difficult to do a corporate action like that when you are in the middle of a formal strategic review, right. So, your question is a good one, so it’s something that we will put in our bag of tricks to look at going forward and buying back our stock away from the already announced program in the form of the tender. There is no question about that’s part of the bag of tricks that we will look at going forward in addition to using our cash to strategic activities like Rangemark and other things that we will contemplate to fast-forward our revenue strength. So, it’s that balance between the one-time gain that you get from buying back your stock at a discounted book versus the ongoing business venture that you can build out using that cash. So, it’s a normal tension around how you spend that money.

Unidentified Analyst

Okay, well, I mean this is in a cash burning business, this is a sort of a low capital intensive business and it seems like you are choosing to run it that way, I mean, do you think the balance sheet reduction is done here or you, are going to take the balance sheet leverage down a little bit more?

Thomas Hughes

Yeah, I think where we are migrating towards the smaller balance sheet. I think as we pickup our customer volumes and we are more content provider, analytical focus and less capital. Yes, our goal would be to use less capital in the future and have more of an agency activity rather than a principal activity.

Unidentified Analyst

Okay and seeing what you see now in the business and with your personnel, you think we can sort of make progress, steady progress through this year towards profitability and maybe come out towards the end of the year with a sort of a profitable organization?

Thomas Hughes

Yeah, that’s – clearly that’s our goal. I will say going back to the strategic process and I know I am sure you are aware of this, there is an enormous amount of a formal strategic process, there is an awful lot of corporate energy that is used towards that. We’ve again our conclusion was that are strategic plan will best serve our shareholders in the long run and our customers. And I look forward to spending a lot more time and our senior management team spending a lot more time focusing on opportunities to build our revenue stream to that point.

Unidentified Analyst

Could you utilize your cash on the balance sheet $40 million that at least you show on the latest balance sheet or is that somewhat restricted is it in various entities I mean is that cash that’s available to the corporation?

Bryan Edmiston

Yeah, the cash is certainly available to the corporation.

Unidentified Analyst

Okay. I wouldn’t encourage you guys seriously to buyback your own stock particularly at such a discount to its liquidation value if indeed that is the liquidation value?

Thomas Hughes

Thank you.

Operator

Okay. Thank you for your question. Sir, we have no questions at this time. (Operator Instructions) Your next question comes from Michael Kamen, he is a Private Investor. Go ahead please.

Michael Kamen - Private Investor

Outside of ClearPoint how many employees do you have now?

Thomas Hughes

It’s about 250.

Michael Kamen - Private Investor

Thank you.

Operator

Thank you for your question. We have no question now, so I would like to handover call back to Thomas, Mr. Thomas Hughes for the closing remarks. Please go ahead.

Thomas Hughes - Chief Executive Officer

Thank you, operator. I’d just like to thank all of our participants today. Obviously, we are open to any conversations that you’d like to clarify any of the numbers or business propositions that we spoke about today. But again thank you for the support and we look forward to a very, very good 2013.

Operator

Thank you, ladies and gentlemen for your participation in this conference call. This concludes your presentation. You may now disconnect. Thank you for joining.

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