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Executives

Richard B. Handler – Chairman of the Board, President, Chief Executive Officer

Peregrine C. Broadbent – Chief Financial Officer, Executive Vice President

Brian P. Friedman – Chairman of Executive Committee, Director

Analysts

Steve Stelmach – FBR Capital Markets

Patrick David – Bank of American Securities

Douglas Sipkin – Pali

David Trone – Fox-Pitt Kelton

Daniel Harris – Goldman Sachs

Michael Hecht – JMP Securities

Lauren Smith – Keefe, Bruyette & Woods

Jefferies Group, Inc. (JEF) Q1 2009 Earnings Call April 21, 2009 9:00 AM ET

Operator

Welcome to the first quarter 2009 earnings conference call. During the presentation, all participants will be in a listen-only mode, after which we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded. Your speaker for today is Mr. Richard Handler. Sir, you may begin.

Richard Handler

We’ll now start the call but we will have people refer to the disclaimers that we’ll read at the end of the call today. Good morning and thank you for joining our discussion of Jefferies first quarter results. I’m Rich Handler, the CEO of Jefferies and with me on the call today are Brian Friedman, Chairman of our Executive Committee, and Peg Broadbent, our Chief Financial Officer.

I’m pleased to report that Jefferies has returned to profitability in the first quarter with net income of $38 million, or $0.19 per share and net revenues of $347 million. Our performance was driven by record net revenues in fixed income and commodities, which helped compensate a very slight activity in our traditionally strong capital markets and mergers and acquisitions businesses.

Our first quarter results make it clear that we have distinguished ourselves from both the TARP-subsidized institutions as well as the small and mid-cap brokers and boutiques. The performance of our fixed income businesses highlights the breadth and depth of our full-service, client-focused, independently-funded Wall Street securities firm.

As we stated on the cover of our Annual Report at Jefferies it’s ‘Clients First. Always’ Our leverage focus on serving clients continues to drive our franchise and our results. We have invested many years, an immense amount of human effort and much expense to build what we believe is a first tier provider of sales, trading, research and investment banking services.

Our first quarter results reflect only the beginning of what we expect to realize over time from this investment. The events of the last 21 months, and particularly the incredible change in the competitive landscape over the last 13 months, have only enhanced our long-term opportunity we envision for our firm. We have spoken for a long time about diversification and continued development of our capabilities.

Our first quarter results: net revenue of $203 million in fixed income and commodities is testament to these efforts. We told our shareholders a year ago that we raised equity dollars swiftly and efficiently not because we had to, but because we wanted the ability to play offense and build our firm while others were being forced to shed assets, businesses and capable professionals.

Our firm, which was born in equities, expanded into convertible and high yield securities, and then got diversified to full-service investment bank is now a similarly first tier competitor across the fixed income spectrum.

Our bottom line for Q1 was also materially helped by the impact of the cost control measures we implemented last year. We have achieved both greater flexibility and permanent reductions in our cost base. We believe some further cost savings may be obtainable over time, but we also expect some fluctuations in expense levels from period-to-period due to changes in the mix and magnitude of activity levels, as well as the occasional one-off items.

All this being said the market environment remains uncertain and fragile. We are not close in any sense to declaring victory and recognize the challenges and the risk that we face in our industry every single day.

Credit spreads remain wide and the capital markets are only beginning to loosen up. Even though we have made considerable progress and feel great about our long-term market position, we will continue to maintain a high liquid balance sheet as well as a conservative risk posture in the face of these uncertainties.

Now, I’ll turn it over to Peg to discuss our results and financial position in more detail.

Peregrine Broadbent

Thank you, Rich. Before we address the numbers, we’d like to draw your attention to three changes in the presentation of our results that do not impact the bottom line but are nonetheless worthy of note. First, in our revenues by source statement, the third financial table of our press release this morning, we no longer include a separate net interest line item. Consistent with how we internally measure the performance of our trading business and also consistent with what we believe has been the methodology of other major Wall Street securities firms, we’ve attributed the net interest revenues to each of our trading business lines, equities, fixed income and commodities and high yield, which generated or consumed the net interest.

Second, as required by new accounting guidance relating to noncontrolling interests in consolidated financial statements, FAS 160, we have reclassed a portion of our minority interest into our revenues both for this quarter and historically. However, we have ignored the impact of this reclassification for the purposes of calculating our compensation ratio.

Third, also in accordance with new accounting guidance FSP EITF 03-6-1, our total net earnings are now allocated between outstanding common shareholders and holders of unvested restricted stock and restricted stock units, who are also entitled to any dividends paid. There is no impact of this quarter’s earnings per share available to common shareholders but prior quarters’ EPS amounts have been restated. To the extent that these holders are entitled dividends or dividend equivalents along with common shareholders if declared, proportion of our earnings have been attributed to those other holders.

In addition, we did not early adopt the recent changes in mark-to-market rules and we would like to note that these results would not have been affected, had we implemented FAS 157-4 in the first quarter. Further, we do not mark-to-market any of our outstanding debt obligations.

Now, turning to the first quarter results. As Rich mentioned, our net revenues for the quarter were $347 million, which is an increase of 56% versus $222 million generated in the first quarter of 2008, and an 86% increase from the $187 million of net revenues in the fourth quarter of 2008. Equities net revenues were $103 million for the quarter, a decrease of 28% as compared to the first quarter of last year and up 18% from the fourth quarter.

Lower average stock prices and reduced cash equity trading by hedge funds impacted our global commission income for the quarter. Our record fixed income and commodities revenues of $203 million, represents an increase of more than four-fold over the comparable quarter last year.

After significant hiring and growth, our corporate bond, mortgage- and asset-backed, emerging markets and convertibles businesses, all were up considerably versus last year’s first quarter. Meaningfully high results were also delivered by our newly expanded governments and agencies business.

Our results and high yields have improved materially, but with some continued mark-to-market pressure, we are still not where we expect to be in this historically strong and important business line. Revenues were negative $7 million for the quarter versus a loss of $53 million for Q1 2008. Investment banking revenues were $37 million in the first quarter, down 63% compared to the first quarter of 2008, as the capital markets and M&A businesses were frozen for most of the quarter.

Asset Management revenues for the quarter were flat, a significant improvement from prior periods, but also not where we expect to be long-term. Non-compensation expenses were $85 million versus $95 million, and $148 million in the first and fourth quarters of 2008 respectively.

Compensation expenses were $213 million, or 62% of net revenues. This ratio is calculated as I mentioned at the outset, excluding the reclassification of revenue attributable to minority interest holders. Our quarterly comp rate approximates to the 60% we are targeting for the full year.

First quarter compensation expense traditionally runs higher than the full year due to the frontloading of FICA taxes. Earnings per common share were $0.19. Most of our basic and diluted weighted average of common shares increased during the quarter to $203 million, as a result of the changes to the terms of our stock compensation program that we implemented and announced at the end of last year.

During the quarter, we repurchased 6.2 million shares at an average price of $12.77 per share. To be clear, 4 million of the first quarter’s 6.2 million repurchased shares were repurchased in early January and we announced that purchase on our 2008 year-end results conference call.

At quarter end, book value for common share was $12.23 based on 169 million shares outstanding. Our pro forma book value to common share was $10.48 based on 197 million shares outstanding, including restricted stock units. All estimated balance sheet metrics at the first quarter-end continues to demonstrate the strength and transparency of our balance sheet and still sets us apart positively from the norms that prevailed in our industry in recent years.

We estimate our gross and adjusted leverage ratios at nine times and 5.8 times respectively. We expect modest increases in our balance sheet and these ratios over the course of the next year as our inventories of liquid government and agencies securities increase with the ongoing expansion of our fixed income businesses.

We estimate as of March 31, 2009, our level three assets after accounting for non-economic exposures or minority interests were $395 million and continue to represent about 6% of our total assets. Our Value at Risk levels continue to remain relatively low during the quarter. We estimate that our average VaR was approximately $4.5 million, compared to $7.6 million for Q1 2008.

We ended the quarter with 2,296 total employees, a net increase of 55 people since the end of last year, and inclusive of the addition of 75 people on March 27, 2009 when we close the acquisition of DEPFA First Albany Securities, which is now a municipal bond and public finance business.

This total firm starting level can be compared to 2,514 employees at December 31, 2007. Rich will now address in more detail the results of our trading platforms.

Richard Handler

Thanks Peg. As we've already indicated, the star of our diversified business right now is our fixed income platform. Jeffries fixed income businesses are benefiting most directly from a significant addition of talented professionals, the huge change in competitive landscape, as well as from the ongoing volatility in these locations in the markets. Having invested to attract and build top tier sales and trading teams across the fixed income spectrum, we are well positioned to realize the potential of our efforts.

We've established a significant market share in high-grade corporate bonds, mortgage- and asset-backed securities, as well as emerging market securities. Our hiring over the last six months of top sales and trading professionals in agency and government securities also began to have an impact on our result in Q1 and should become more significant over time.

Finally, on the last day of the first-quarter, we welcomed to Jefferies approximately 75 professionals in municipal sales and trading and public finance. Over the coming periods, we expect fixed-income to continue to develop and will further expand this effort globally. Both our domestic and global convertible sales and trading desks also performed strongly in Q1.

In aggregate, we have more than 250 employee partners today, within our global fixed income and commodities businesses. And it’s important to stress that the results we achieved this past quarter are the result of the facilitation and execution of strong client-to-go business. This is clear from a comparably low level of Value at Risk in relation to our strong sales and trading results.

We are dealing with more clients throughout the fixed income markets than ever before and they are increasingly looking to Jeffries as a core dealer in fixed income securities. As Peg mentioned, our high yield revenues were modestly negative at just over minus $7 million for the quarter, while a major improvement over the last year, we are not at all satisfied with this result.

Our share of customer flow of business has never been stronger but we are still working through some legacy inventory for which we again recognize what we hope would be temporary markdowns. We expect to continue to ramp-up our clientele business, as we’re adding a number of professionals in the par bank loan space as well as in distressed securities.

We have added about 15 new professionals to this platform over the past six months. We’ve an exceptional team of talented sales and trading professionals as well as a leading position in these markets. We expect to realize on the value of this platform in coming periods.

Our equity revenues were up versus last quarter, but down from the same period last year. Commission rates were down, due to the lower average price of securities traded, with low priced financials dominating the headlines in the trading flow. Hedge funds overall were in defensive posture during the quarter. Though our business with them was down, we believe our market share is solid and improving.

We are increasing our focus on serving the larger long-only Investment Managers and efforts we’re sure we maximize our results across the Board. The prevailing low interest rates have a dampening effect on the revenue of our prime brokerage business although we continue to grow our client base.

In addition to signing up new prime brokerage clients, at the end of the first quarter we absorbed and we turned phenomenal consideration approximately 87 clients from BNP Paribas last year according to prime brokerage business of Bank of America. From a standing start just over two years ago, we now serve 312 prime brokerage clients.

Now I like to turn over to Brian Friedman, who’ll discuss our investment banking and Asset Management areas.

Brian Friedman

Thanks Rich. Our Investment Banking revenues were $37 million, our lowest quarterly revenues in sometime. Advisory revenues were $22 million and capital markets generated only $15 million for the quarter. M&A revenues generally derived from transactions that have a three to six-month gestation period.

The Lehman bankruptcy, the mega investment banks becoming bank holding companies, the government takeovers of AIG, Fannie Mae, Freddie Mac and a number of European financial institutions, and the attendant severe dislocations in the markets in the fall, all that stopped M&A activity by year-end 2008.

While recent weeks have seen stirrings of a new round of corporate consolidation, there were very few M&A deals closed in the first quarter. According to Thomson Financial SDC, closed M&A volume for the first quarter of ’09 versus the first quarter of ’08 was down by over two-thirds.

Capital markets activity, ex-financial institutions capital replenishment was also extremely limited in Q1. We expect investment-banking revenues will remain below trend for at least the second and possibly the third quarter of 2009, as we rebuild our M&A backlog and the capital markets reopen more broadly. We believe the aggressive government action has all but taken the global systemic risk card off the table.

Now we must deal with a severe recession and the recapitalization of much of the financial services industry. We are at a cyclical low in our Investment Banking business, but we have been here before and understand the importance of judiciously maintaining our broad platform, as well as being opportunistic to enhance further our market position. The one currently growing part of our Investment Banking franchise is our recapitalization and restructuring practice, where our depth of industry specific knowledge combined with our breadth of capital markets expertise, afford our clients a distinct advantage, as compared to working with other advisors who lack the full capabilities and resources of our platform.

During the first quarter, we added 12 new professionals in this area. We now have a dedicated global team totaling 45 professionals focused on delivering restructuring solutions to a wide range of companies and creditors, who are facing urgent complex restructuring issues in this challenging environment.

Our Asset Management business had essentially no net revenues as a modest loss on our investments offset our fee revenue. The investment loss derived from small residual positions from funds we closed over the past 12 months. Our two continuing hedge funds in fact performed very well for the quarter both delivering positive results and adding assets.

Similarly our long-only global convertible asset management business now manages about $1.3 billion in assets and is focused on growing and broadening its franchise. We don’t except any ongoing drag from our asset management efforts and hope ultimately to drive this business toward a meaningful contribution to our results.

Now I would like to turn it back to Rich.

Richard Handler

Thanks Brian. We can sum it all up by saying simply what a different year mix. We spent the last one year plus making decisions based on quickly embracing the reality of the new world order. In April 2008, we sold a 13.7% stake in our firm to raise $430 million of cash from our very small strategic partners at Leucadia. We reduced our risk profile across our platform in maintaining meaningful liquidity, adjusted executive compensation and stopped our dividend to further enhance our cash position.

Hopefully, it is little clear today that we did all so we could play offence and take advantage of what we view as a once in a generation opportunity to further diversify and expand our global footprints and client offerings. Carefully and quietly, we not only secured our foundation, but we also accomplished a major improvement and further diversified our business.

While, we have maintained and in many cases enhanced our historical core businesses and competencies, it is clear that we are very different from today than we were just a year ago. We believe Jefferies is still early in its realization of a major market opportunity and we fully recognize that the hard work is just beginning.

We are now open for questions. Operator?

Question-and-Answer Session

Operator

A press release containing Jefferies 2009 first quarter financial results was distributed via BusinessWire before the market opened today and can be accessed at Jefferies website www.jefferies.com.

Some of the comments made in this conference call may include forward-looking statements. These forward-looking statements may contain statements about management's current expectations, strategic objectives, growth opportunities, business and prospects. These forward-looking statements are not statements of historical fact and represent only Jefferies' beliefs as to future performance. They usually include the words continue, will, believe, should, or other similar expressions. Actual results could differ materially from those projected in these forward-looking statements. Please refer to Jefferies' annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2009, and in Jefferies' Forms 10-Q and 8-K for discussions of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.

Thank you. (Operator instructions). Your first question comes from Steve Stelmach with FBR Capital Markets.

Steve Stelmach – FBR Capital Markets

Hi, good morning.

Richard Handler

Good morning.

Steve Stelmach – FBR Capital Markets

Rich, you mentioned that fixed income benefited from high-grade mortgage emerging markets. To what extent was that benefit the result of just drilling out that platform versus what appear to be pretty favorable conditions in the first quarter? Any sort of color would be helpful?

Richard Handler

I think the vast majority of it is the built out that we have put in place across the spectrum of the fixed income market and the markets were favorable in terms of the volatility but we basically got market share across the board.

Steve Stelmach – FBR Capital Markets

Okay, so primarily the result of your own efforts rather than just the favorable markets?

Richard Handler

I think, our team did an outstanding job and I give them the credit.

Steve Stelmach – FBR Capital Markets

Okay.

Richard Handler

At the close of the market.

Steve Stelmach – FBR Capital Markets

Okay. And then just starting with the prime brokerage, it sounds like that that was a business it took you further up I guess a little bit in 2008 and obviously now there is an opportunity there more so than it was last year. Can you give us a little bit broader characterization of what you are doing within prime brokerage? Anything different today than you were maybe six months ago?

Richard Handler

I don’t think that’s the right characterization. We gained a lot of clients in the course of 2008 and picked up a fair number of people from the larger folks. It’s obviously long-only and I would say long and short hedge funds that we are going after in common equities for the most part and it’s traditionally, what we have been doing from the start. We’re just gaining more and more traction.

Steve Stelmach – FBR Capital Markets

Okay, and what’s it for the size of your prime brokerage clients?

Richard Handler

Yeah we are focusing on the smaller folks below $100 million.

Steve Stelmach – FBR Capital Markets

Got it, okay. And then just quickly, over the course of the end of the past 12 months or so, a few primary dealers were lost or merged? What’s your take on potential for the increase of roster of primary dealers and is there an opportunity there for you guys?

Richard Handler

We really can’t comment on that at this point.

Steve Stelmach – FBR Capital Markets

Great, all right, thank you guys.

Operator

The next question comes from Patrick David with Bank of America Securities.

Patrick David – Bank of American Securities

Good morning. You mentioned that you're targeting 60% comp ratio for the year. Given the uncertain revenue environment. Do you have an idea of what you think like a low level of revenue run rate could be to maintain that before you have to ratchet it up?

Richard Handler

It very much depends on the mix of revenues within our different business lines. So, it's quite difficult to answer that question with just one number.

Patrick David – Bank of American Securities

Great. Okay. Well in that vein, you continued your steady pace of hiring to take advantage of the environment, but managed to keep the comp down from was about a $250 million run rate last year. Have there been any changes to the packages that you're paying, to get these people like less guarantees, lower level of guarantees or less multi-year guarantees, could you give us some color on that?

Richard Handler

Number one, I think it's worth noting and it was mentioned by Peg, when he went through the headcount numbers that we significantly reduced our headcount over the last 15 months. While at the same time adding new business lines, so that alone is very helpful. Beyond that I mean, Peg really covered, it all comes back to mix.

Patrick David – Bank of American Securities

Right.

Richard Handler

Is matching the revenue against the headcount.

Patrick David – Bank of American Securities

Okay. And then you gave us some more detail on the 10-K on the mortgage securities portfolio. I understand that these were purchased at already distress prices this past summer, but could you give us an idea of where those are marked relative to where you purchased them and how that portfolio is performing?

Peregrine Broadbent

First of all, the majority of mortgage inventory is liquid and easy to price and gets turned over pretty rapidly to the extent that we have a very small portion of our portfolio that we keep in position for a period of time. The price is pretty much still close to where we purchased.

Richard Handler

The important point is this is not an inventory that we purchased for investment. This is a portfolio that we purchased for investment. This is a training inventory that we turn over relatively quickly.

Patrick David – Bank of American Securities

Even the portion that’s in level 2 and level 3, the Alt-A and subprime.

Richard Handler

Yes.

Patrick David – Bank of American Securities

I got it.

Richard Handler

Thank you.

Operator

Next question comes from Douglas Sipkin with Pali.

Douglas Sipkin – Pali

Good morning. Just wanted to spend some more time on the-fixed income trading, I guess, just trying to dig into. I was just a little surprised to see such a strong fixed income trading result, but the high yield still not benefiting from that. I guess you guys eluded to some sort of legacy positions that you are still trying to work of, but I guess I’m just trying to understand, I know the two revenue lines, one is corporate bonds and the other is high yield, I guess when you classify that as corporate you’re talking about high grade debt as opposed to high yield?

Richard Handler

That's correct.

Douglas Sipkin – Pali

Okay. And could you maybe just explain, I mean how long do you think it’ll take to sort of work down those legacy positions in the high yield market, in your high yield business I should say?

Richard Handler

Well, the high yield market, people forget from January 1, before the second week of March, the high yield market was pretty dislocated and that the big improvement we saw in the last couple of weeks of March were primarily in larger names. We think if our legacy positions are marked properly right now, we believe they’ve always been marked properly and then the future will be depending upon what happens to these positions, but we believe our customer flow business should start to more than compensate for the valuation declines that we have had. They’re marked relatively low at this point in time but at the same time if the market goes lower, we have to mark it lower.

Douglas Sipkin – Pali

Okay, that’s helpful. Obviously it clearly looks like the hiring efforts from some of the dislocated bugle bracket firms is paying off, where are you guys in terms of hiring within fixed income trading? Are you where you want to be from a headcount standpoint or you are going to continue to look to add, if the opportunity presents itself?

Richard Handler

We are seeing more and more opportunities everyday, and we can afford to be selective but we will be opportunistic.

Douglas Sipkin – Pali

Okay, and then can you just talk a little bit about sort of what the acquisition of First Albany’s business is going to add for you guys? I guess munis is the focus. Can you talk a little bit about what that’s going to bring?

Richard Handler

It’s going to bring a combination of sales and trading revenues into our fixed income as well as origination revenue and advisory revenue into our Investment Banking. It’s essentially a full service business in public finance.

Douglas Sipkin – Pali

Okay, and then just a question for Peg and I appreciate the disclosure around the different share counts. Help me understand, I know you guys provided the adjusted share count, what sort of has to happen for the adjusted shares to become ending shares?

Peregrine Broadbent

The adjusted shares which includes restricted stock units, those restricted stock units have to convert into restricted stock. So, that will happen over a period of a number of years.

Douglas Sipkin – Pali

I got you. So it’s really an election on the part of employees to further prefer restricted stock for tax purposes?

Peregrine Broadbent

No, there is no election at the time that compensation is awarded in the form of stock and employees select some of that compensation to be in the form of restricted stock units. At that time we're locked in as to the timeframe as restricted stock units will convert into restricted stock. The GAAP measure of outstanding shares is only restricted stock. The adjustment we’ve made is for restricted stock units and those restricted stock units at the weighted average of two to three years, will convert into restricted stock. And this is the set timeframe for that.

Douglas Sipkin – Pali

Okay, perfect. And then just finally, just in terms of trying to get a bigger picture of the balance sheet, it sounds like you guys are comfortable with where you are from a leverage standpoint. And it sounds like you did repurchase some shares. I know, obviously the events of 2008, the best policy was to build capital. But given sort of the level of outstanding shares, I mean is that something you guys are thinking about now in 2009, maybe getting a little bit more aggressive repurchasing shares when you see fit.

Peregrine Broadbent

I think first and foremost when we show our balance sheet is strong and secure, we feel very comfortable about and secondly, we want to make sure that we minimize dilution. So, I think you will see us balance those two things throughout the future.

Douglas Sipkin – Pali

Okay, perfect. Thanks.

Operator

Next question comes from David Trone with Fox-Pitt Kelton.

David Trone – Fox-Pitt Kelton

Hi, good morning. Couple of questions; are you actually willing to tell us how much the write downs were in high yield that netted out to that negative 7?

Peregrine Broadbent

No, we don't breakdown the individual position.

David Trone – Fox-Pitt Kelton

Right. But I mean just customer flow versus markdown.

Peregrine Broadbent

Yeah. I mean we don't break that down.

David Trone – Fox-Pitt Kelton

And you may have mentioned this, but you have in your revenue by source the other is $6 million. Did you happen to mention what that was.

Peregrine Broadbent

No, I didn't mention what it was, it actually relates to about $12 to $15 million of long-term debt that we repurchased during the quarter, which yielded $6 million profit and we thought appropriate to disclose that as a separate line item.

David Trone – Fox-Pitt Kelton

So, you don’t mark that up but you did a cash purchase?

Peregrine Broadbent

We don’t mark any of our liabilities to market and booking though we did purchase actual securities.

David Trone – Fox-Pitt Kelton

Okay. And how much more that is potentially available?

Peregrine Broadbent

It depends on the markets.

David Trone – Fox-Pitt Kelton

Okay. And lastly you may have mentioned this too but I didn’t catch it, .you said FASB 160 as a minority interest was moved into revs, did you mention where that landed?

Peregrine Broadbent

Yes, I can be specific. There was a about 5 point of our total revenues that we reported, which was $347 million, there was a minority interest loss to the extent it’s attributed to our high yield business of $5.3 million off that was recorded in revenues. If you look at our income statement, there is a line item on the income statement, towards the bottom of the revenue section, it reads net revenues of $342 million, then it says t on mandatorily redeemable interest of consolidated subsidiaries not related to a portion of the minority interest that would have previously been classified at the bottom of the earnings statement.

David Trone – Fox-Pitt Kelton

Okay, thank you.

Peregrine Broadbent

Thank you.

Operator: your next question comes from Daniel Harris with Goldman Sachs

Daniel Harris – Goldman Sachs

Good mornings guys.

Peregrine Broadbent

Good morning

Daniel Harris – Goldman Sachs

I was hoping that you could, within the thick line and come back to this a little bit more, can you sort of rank the top additions to the growth year, I know you stated that there has been a number of them, was corporate high-grade bonds, if they guess commodities the lowest, can you give me a little more color on that?

Peregrine Broadbent

The two biggest businesses today in fixed income and commodities both in terms of headcount and net revenues are in no particular order, cooperates and mortgages and our emerging markets business would currently and governments will be closed for third and the fourth, with governments ultimately becoming, we expect a much larger business or at least more rapidly growing for us than emerging markets.

Daniel Harris – Goldman Sachs

Okay, and is it fair to say that commodities would be fith?

Peregrine Broadbent

That will be fair to say.

Daniel Harris – Goldman Sachs

Okay, and on the Depfa First Albany, is there any way for us to think about quantifying the revenue impact and I understand that it’s a fluid environment and uni issuance is still somewhat challenging, but how do we think about that given the strength that you guys have in fixed income in the first quarter, my guess is that is going to be on the incremental positive but, I don't know if that’s $10 million or $15 million.

Peregrine Broadbent

We would agree with the incremental positive and we would like to see how the next couple quarters deliver, you will see that as it comes through.

Daniel Harris – Goldman Sachs

Okay. And then just last question on fixed income, obviously you guys have built up a number of new businesses but in this quarter specifically, given the huge strength that we saw, how much of that was just claims spreads widening and I know you said you picked up you added a lot of businesses but how much was that just because the market for trading credit has just got a lot more profitable in some cases?

Richard Handler

It's difficult to measure because we have such a growing and changing business, there is no question that spreads widened. The best guidance, we can give you is look at our relatively low Var level and yet you’re seeing the revenues. So the thing we would emphasize is that while spreads may be a bit wider, most importantly for us fixed income as with all of our businesses are dramatically client flow

Daniel Harris – Goldman Sachs

Okay. And then just two quick questions for Peg, on the expense side, floor brokerage and clearing dropped pretty substantially, and my guess is that’s tied to equities, but can you give me a little more clarity on that. And then business development in travel also low level as we’ve seen the low time and the long time, is that owing to the lower level of investment banking and should we consider that that would go higher towards the end of the year if activity picks up?

Peregrine Broadbent

Yes with respect to your comment on travel and entertainment. On the brokerage cost, they actually increased this quarter over the first quarter of last year, the reason for that was that although volumes were a little lighter this quarter, they were sufficiently light not to actually receive a volume rebate from some of our broking clearing agents

Daniel Harris – Goldman Sachs

Okay. Thank you

Operator

Your next question comes from Michael Hecht with JMP Securities

Michael Hecht – JMP Securities

Hi, guys good morning, how are you doing?

Richard Handler

Good.

Michael Hecht – JMP Securities

Just a follow-up on where you kind of ended the quarter on headcount, can you give us an update on where you are with reductions, I think you're kind of winding down on some of the reductions you made through last year and then obviously you’re kind of still adding in on the fixed income side, just trying to get a sense that you’re looking to continue to add there and then, there are additional cuts to come, like equities and banking where the results have been a bit weaker?

Peregrine Broadbent

We’re very carefully balancing a continual review of our business lines in a period as we've all been going through and continue to go through. There is a heightened focus on cost control and efficiencies. So we cannot and will not stop making sure that we maximize results and improve our efficiency. I think you’re going to see a delicate balance between that, and on the other hand continuing additions particularly in the sales area as well as in other areas.

Michael Hecht – JMP Securities

Okay. That's fair enough. And sorry if I’ve missed this before. Did you guys talk a little bit about the backlog on the Investment Banking side across M&A and equity capital markets in particular?

Peregrine Broadbent

No, in a way, if you look at the last quarter or two, it has become more difficult to truly talk about the backlog because

Michael Hecht – JMP Securities

Sure.

Peregrine Broadbent

You have many, many deals, truly a large number that are on one list or another but they are awaiting market conditions. They are awaiting events. Deals truly go down to few days before closing and have a change in circumstances. So it's very hard right now to really talk about backlog. As we indicated in our prepared remarks, we're hopeful that our backlog will begin rebuilding whatever that means.

Michael Hecht – JMP Securities

Okay. And then in banking could you guys give the mix of the contribution from M&A versus underwriting and just within M&A I’m just trying to get a sense of the restructuring versus the more traditional activity. I know you don't breakup the number but just general?

Peregrine Broadbent

We did indicate that little better than half of the revenue was from advisory versus capital markets. Capital markets was really very quiet. It was 22 in advisory, 15 million in capital markets. We don't breakout restructuring, but as we indicated and you can assume we wouldn't be adding headcount there if we didn’t we see a better result in growing business, we see it continuing in probably a multiyear opportunity in terms of revenue there. And that is an ongoing business as you know, it's not as event driven as it is,it goes for periods.

Michael Hecht – JMP Securities

Okay, and then maybe just coming back to the strength in fixed income, just to maybe get a little bit more color in terms of maybe prioritizing the areas of strength across, kind of rates mortgages and investment grade credit and then munis maybe being that the next kind of opportunity here is that, you are already kind of seeing some benefits from your activities there.

Peregrine Broadbent

Apologies, but we actually covered that about two questions ago.

Michael Hecht – JMP Securities

Okay. No, no I’m sorry.

Peregrine Broadbent

You might call us later, happy to go through. It’s on the replay, but we just did it for the group sorry.

Michael Hecht – JMP Securities

No problem and just the last question, I don’t think you went through this one today, I heard the question on the RSUs and how the shares are not in the count for the book value calculation, is there any contribution on the RSUs, benefit that goes into the shareholders equity but not in the shares.

Peregrine Broadbent

No.

Michael Hecht – JMP Securities

Okay.

Operator: Your next question comes from Lauren Smith with KBW.

Lauren Smith – Keefe, Bruyette & Woods

Hi good morning, I think we’ve covered most everything, but I guess just two quick ones, did you give any color on in the equities business with respective to block trading trends in the quarter, were there any meaningful ups or down there during the last quarter I guess you guys had some block trading losses.

Peregrine Broadbent

There was no meaningful contribution one way or the other by block trading activity.

Lauren Smith – Keefe, Bruyette & Woods

Okay. And then just lastly for me, just any color you may provide, how you're thinking about the wealth management business going forward, I mean your hired Mark Peters with SunTrust to come with a pretty significant experience. Just kind of your thoughts there what the opportunities are?

Richard Handler

Well. First of all, he is literally just getting started. So it's early days, but we believe that with the expansion of our fixed income business particularly our municipal capability as well as our government and agency capability on top of the firms, otherwise broad platform in products and trading, we felt that it was timely and in light of competitive changes to put a greater push on it. We're not going to quantify and we're not going to talk about a trajectory, but it clearly signals that we have increased our focus and our commitment to that business.

Lauren Smith – Keefe, Bruyettte & Woods

Okay, great. Thank you.

Operator

And no further questions. I'll now turn the call over to Mr. Handler.

Richard Handler

We would like to particularly thank our employee partners who spent the past 21 extremely difficult amounts working relentlessly to protect, diversify and improve our firm for the benefit of our client, shareholders and bondholders. We've been through a lot together and as we start to come out on the other side of this brutal period, the reason why we are in such an enviable position is because of the dedication of everyone in our team. Thank you.

Operator

Ladies and gentlemen, that does conclude this call for today. We thank for your participation and as such please disconnect your line.

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Source: Jefferies Group, Inc. Q1 2009 Earnings Call Transcript

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