Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Richard Handler – Chairman and CEO

Brian Friedman – Chairman, Executive Committee

Peg Broadbent – Chief Financial Officer

Analysts

Steve Stelmach – FBR Capital Markets

Chris Kotowski – Oppenheimer & Company

Douglas Sipkin – Ticonderoga

Michael Wong – Morningstar Equity

Casey Ambrich – Millennium Partners

Daniel Harris – Goldman Sachs

Lauren Smith – KBW

Jefferies Group Inc. (JEF) F2Q10 (Qtr End 05/31/2010) Earnings Call June 22, 2010 9:00 AM ET

Operator

Welcome to the Jefferies 2010 Fiscal Second Quarter Financial Results Conference Call. A question-and-answer period will follow managements prepared remarks. (Operator Instructions)

As a reminder, this conference call is being recorded. A press release containing Jefferies 2010 fiscal second quarter financial result was distributed via Business Wire 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 assumptions, expectations, strategic objectives, growth opportunities, business and prospects. These forward-looking statements are not statements of historical fact and represent only Jeffries belief as to future performance. They usually include the words such as, continue, will, believe, should, estimate, or other similar expressions.

Actual results could differ materially from those projected in these forward-looking statements. Please refer to Jeffries Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2010 and in Jeffries 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.

I would now like to introduce your host for today’s call, Mr. Richard Handler, Chairman and CEO of Jefferies. Mr. Handler, you may begin your conference.

Rich Handler

Good morning. And thank you for joining our discussion of Jefferies second quarter fiscal results. I’m Rich Handler, 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.

For the three-month period ended May 31, 2010, we posted net revenues of $670 million, net income to common shareholders of $85 million and earnings per share of $0.41.

We are pleased with our strong results, as they reflect progress in our continual efforts to grow, diversify and integrate Jefferies. Our results continue to be well balanced across our major business lines, Equities, Fixed Income and Investment Banking.

Our record quarterly banking results are a sure sign of the continuous strengthening of Jefferies presence and our enhanced brand. Our client focused sales and trading businesses and our increasingly vibrant investment bank realize solid levels of regular business flow even though market indexes were down significantly during the quarter and May was clearly choppy at best.

Our business model remains weighted towards rapid turnover of our liquid inventory rather than positioning of level three or other assets for speculative or proprietary purposes. The results in our global equity business reflect the significant investment we have made in our research and training platform, as we’ve invested heavily to enhance our traditional cash execution capabilities.

Solid Fixed Income results are also reflecting investments we have made in the last two years, which more recently include global expansion. Our firm continues to make enormous progress and we’re staying true to our firm-wide goals of integrating and globalizing our new businesses with our longstanding businesses, while focusing on quality ideas and execution for ever increasing array of clients.

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

Peg Broadbent

Thank you, Rich. As we mentioned when we announced the change in our fiscal year-end November 30th, we are comparing our three months ended May 31st results, which includes March to the comparable three-month period ended June 30, 2009.

As Rich said, our net revenues for the second fiscal quarter were $670 million, an increase of 13% over the second quarter of 2009 and 15% up versus $583 million reported for the first quarter of 2010.

Our net income to common shareholders was $85 million and earnings per share $0.41, which is an approximately 37% increase from the second quarter of 2009 and approximately a 15% increase from the results of $74 million and $0.36 per share in the first quarter of 2010.

Fixed Income revenues were $231 million, 33% below the cyclical influenced second quarter of 2009 and an 8% increase from the $213 million performance in the first quarter of 2010.

Equities net revenues of $169 million were a 37% increase from the second quarter of 2009 and a 2% increase from the $165 million generated in the first quarter of 2010.

Investment Banking revenues were a record $256 million, more than double the second quarter of 2009 and a 29% increase over the $198 million generated last quarter.

Asset Management revenues for the quarter were a solid $14 million versus virtually flat revenues for the second quarter of 2009. Non-compensation expenses were $138 million, compared to $136 million reported last quarter.

The successful growth of our global sales and trading platform over the last two years has driven increases in our operating costs, particularly floor brokerage and clearing, as well as technology and communications. We are working actively to optimize our processes and costs.

Also, our clearing costs have increased in recent quarters as a function of successfully growing our Fixed Income businesses, many of which are cleared by third parties. Within the next 12 months we expect to bring the clearing of most of our Fixed Income activities in-house. We’re adding support teams to accommodate just undertaking. However, we anticipate that the cost of so doing will be more than offset by the corresponding reduction in the clearing costs that we pay to third parties.

Our compensation expense ratio for both the second fiscal quarter and the first five months of the year both approximated 57% within our target range of 55% to 58%. During the quarter we repurchased 1.5 million shares at an average price of $24.98 per share.

Our adjusted book value per common share at the end of the quarter was $11.42 based on 200 million shares outstanding, including restricted stock units. We estimate that our total assets were $32 billion at May 31st, with our average balance sheet during the quarter about 17% higher primarily as a result of our primary dealer activity in both the U.S. and Europe.

We estimate that our level three assets after accounting for non-economic interests were $354 million or about 4% of total assets at fair value. This represents a 29% decrease from the second quarter of 2009 and a 20% decrease from the $442 million at the end of the first quarter.

We estimate our average VAR for the quarter was approximately $8.25 million, reduced from $11.2 million last quarter where several specific opportunities we mentioned on our last call, drove our VAR to above normal levels. Similar opportunities did not arise in the second quarter.

Our tax rate for the quarter was 39.1% versus 39.5% in the second quarter of 2009.

We ended the quarter with 2,821 employees, a net increase of 92 people from March 31, 2010. This increase reflects the continued rounding out of our recently expanded sales and trading capabilities and relevant support team.

Brian will now address in more detail our Investment Banking results.

Brian Friedman

Thanks, Peg. As Peg indicated, our Investment Banking revenues were a robust and record $256 million for the second quarter, more than double the $121 million recognized for the comparable period last year. Capital markets revenues of $183 million are an increase of 35% over the first quarter of 2010. Debt capital markets generated $128 million in revenue and equity capital markets $55 million.

During the five months ended May 31st, our capital markets teams completed 196 debt and 39 equity transactions, raising $24.3 billion of debt and $4.8 billion of equity on behalf of our clients.

During the second quarter, we completed 142 capital markets transactions, including 67 corporate finance deals, 16 mortgage securitizations and 62 public finance offerings. 109 of these transactions were debt deals and 51 of these were lead or joint book-run. The other 33 transactions were equity offerings replacements, of which 19 were book-run.

Our strongest performing sectors remained energy, healthcare and mortgages. Our backlog for both debt and equity remained steady although as always, market conditions and receptivity will determine the timing and extent of conversion of this backlog. We continue to prioritize leading a greater proportion of our capital markets deals as it is the best way to utilize our robust distribution capabilities for the benefit of our clients.

Our M&A and advisory revenues were $73 million for the second fiscal quarter, despite the downturn in the global markets, M&A and strategic activity has continued to pick up. Jefferies has certainly garnered an increasing share with advisory deals such as the $4.7 billion acquisition of our client East Resources by Royal Dutch Shell Plc, the $3 billion sale of the Peregrino field for our client Statoil to Sinochem.

Total’s purchase of a 25% interest in our client Chesapeake’s Barnett Shale gas fields for $2.25 billion and the $1.7 billion joint venture between our client Atlas and Reliance in the Marcellus Shale. Jefferies advising on these deals and others announced in recent quarters such as the acquisition of our client XTO by Exxon proved that we have arrived as a major M&A player.

Activities outside the energy sector have also been robust with Jefferies providing advisory and debt capital market support to a number of clients for recently completed acquisitions, including Kratos Defense & Security’s acquisition of Gichner Systems Group, BioScrip’s acquisition of Critical Homecare Solutions and Code Hennessy & Simmons acquisition of Thermon Industries from Audax. We have the resources and the talent to lead even largest and most complex deals.

We mentioned in last quarters earnings call that we believed our first quarter Investment Banking results were indicative of the direction in which we are heading. Our second quarter results more than confirm this and given our current momentum, all signs are that our enhanced leadership yet larger and more experienced team and our growing brand recognition will allow us to continue to evolve as a major Investment Banking firm.

There is no doubt that a true Wall Street firm with an integrated capital markets and advisory Investment Banking offering is in a distinct and advantageous position with clients around the globe. Another example of this is yesterday mornings announced merger of Valiant and Biovail, where we are serving as a financial advisor and capital provider to Valiant. This transaction, as well as, the XTO transaction and several other recently announced deals are expected to close in the second half of our fiscal year.

Now, Rich will comment on our trading results before we take questions.

Rich Handler

Thanks, Brian. Our Fixed Income revenues were $231 million for the quarter, as compared to $213 million last quarter. Fixed Income performed well in this most recent quarter given that Jefferies is a customer focused firm and customer activity was substantially muted throughout the quarter.

Our Equities revenues were $169 million for the quarter, as compared to $123 million a year ago. We are continuing to work hard to build upon our longstanding domestic cash equities business by integrating value-added research, state-of-the-art algo’s, electronic connectivity, quality prime brokerage services, effective client-oriented traders and a significant capital markets calendar.

As has been the case for the 20 years I have been at Jefferies and the 28 years before I joined, our firm is constantly investing, evolving and adapting, so we can best serve our clients. While competition in our industry is always intense, we believe we are in more control of our destiny today than perhaps ever before in our firms history.

Our capital foundation is strong. Our competitive position has never been better and our 2821 employee partners have never been more capable of delivering quality ideas and execution for our clients. We cannot predict the volatility of the markets or the direction of the global economy, but we’ll do our very best for our client, shareholders and bondholders every day.

Thank you. And we’re available for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steve Stelmach with FBR Capital Markets.

Steve Stelmach – FBR Capital Markets

Hi. Good morning.

Rich Handler

Good morning.

Steve Stelmach – FBR Capital Markets

Congrats on a good quarter. The first question I have is just on FIN reform and maybe you guys could give us an idea of how you see your relative position post FIN reform in light of what’s going on Capitol Hill?

Rich Handler

Sure. First off, no one knows what the final regulations are going to be, so this is all subject to interpretation of whatever rules are going to come out. But I think the most important aspect for a firm like Jefferies is, first of all on the leverage side, we always operate below whatever leverage ratios are going to be imposed on the banks number one.

Number two, we do not have a Fixed Income derivatives business in massive scale like many of our competitors. So, the fact that, it’s going to be put perhaps on an exchange or create a level playing field where it’s really based upon client flow as opposed to capital and balance sheet, we think that would be very positive for us.

We don’t think consumer legislation is going to be an affect on us in terms of those rule. We’re not a bank holding company. I mean all in all, I think we’re as well positioned as anybody by the same token we’ll have to see what develops.

Steve Stelmach – FBR Capital Markets

Okay. That’s helpful. And then just following up on that. From a competitive environment perspective, do you get the impression that, perhaps some of your large competitors who are possibly some of these rules a little bit more than you, have they bowed back their activities a little bit in the recent quarters just to sort of see where the regulatory (inaudible) falls out or are they as involved…

Rich Handler

And we really just focus on our own company and it’s a very competitive world out there, and we’re just really focused on our clients and that’s really what we can comment on.

Steve Stelmach – FBR Capital Markets

Okay. Great. Thanks very much.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer & Company.

Chris Kotowski – Oppenheimer & Company

Yeah. Good morning. I wonder, I’ve tried to straighten out all of the months of the period and I’m wondering, do you have the information on page five of the press release where you give the revenue by sources either for the two months or for the five months, so that we can factor into those numbers?

Peg Broadbent

We don’t actually have it on page five, but I’m sure that you can triangulate between prior publications and what we’ve produced today…

Rich Handler

I think in general to look at it, March, the last quarter -- the last month of the first quarter was obviously a strong quarter for the industry.

Chris Kotowski – Oppenheimer & Company

Right.

Rich Handler

April was a decent month and May was a choppy month.

Chris Kotowski – Oppenheimer & Company

Right.

Rich Handler

That’s the macro perspective.

Chris Kotowski – Oppenheimer & Company

Right. Okay. And then when I tried to calculate the comp ratio for the two months and I realize it’s probably not, it’s probably dubious to read too much into a two-month trend, but I get a comp ratio up near 60% and is that just an elaboration or?

Rich Handler

It’s very hard to look on a one or two-month period from a comp ratio perspective, because it’s so subject to mix and total volumes. But I think the way to look at is we’re pretty confident of our range between 55 and 58 and that’s really how you should model and think of us going forward.

Chris Kotowski – Oppenheimer & Company

Okay. And if you said that, May was choppy, I imagine June would be choppy too?

Rich Handler

Again, May was choppy. I think, May was choppier. But it’s a -- the good news is that we have a strong bank backlog. We have a diversified platform. As painful as May was, it wasn’t a bad month for the organization. It just wasn’t as nice as March.

Chris Kotowski – Oppenheimer & Company

Okay. And that’s it for me right now. Thank you.

Rich Handler

Thank you.

Operator

Your next question comes from the line of Douglas Sipkin with Ticonderoga.

Douglas Sipkin – Ticonderoga

Yeah. Hi. Good morning. Can you hear me?

Rich Handler

Sure we can.

Douglas Sipkin – Ticonderoga

Okay. Great. First off, just wanted to dig in on the Investment Banking, I mean, obviously you guys are doing terrific there and is it a function of the hiring or taking some market share just given everything that’s gone on with the larger organizations over the last year and a half?

Rich Handler

You know, it’s always hard to tell, but we believe it’s all of the above. You’ve clearly got a cyclical recovery that we’re participating in. You would think that we have market share gain over competitors and there’s no doubt that we continue to strengthen our team. We don’t believe that we’re yet at anything near the top of the cycle, it’s still a recovery period and we also don’t think that we have perfected our investment bank. We think we have a long way to go.

Douglas Sipkin – Ticonderoga

Okay. That’s very helpful. And then just a little bit on the balance sheet stuff. Did you guys disclose what you repurchased for April and May, or what the buybacks are for the three-month period?

Peg Broadbent

Yeah. We did. We said that, we -- during the quarter, we repurchased 1.5 million shares at an average price of $24.98 per share.

Rich Handler

It’s for the three-month period.

Peg Broadbent

Three-month…

Rich Handler

So that includes March?

Douglas Sipkin – Ticonderoga

The question is for the five month period how many shares do we purchase, that’s the question.

Peg Broadbent

I’ll have to get back to you on that, Doug.

Douglas Sipkin – Ticonderoga

Okay. And then so, obviously you guys have had…

Rich Handler

Although, Doug, I’ll tell you, I think most of the shares were purchased in May, so I don’t think…

Peg Broadbent

Yeah. March I believe was substantially a back out period.

Douglas Sipkin – Ticonderoga

Yeah. Okay.

Rich Handler

Yeah. I think you could assume, unless we clarify it, you could assume the million and a half were all purchased in the two-month -- last two-month period.

Douglas Sipkin – Ticonderoga

Okay. That’s helpful. And does that explain, I mean, I guess, I’m just sort of looking, I mean, obviously, you guys have done well to start the year. The book value though keeps creeping lower and I’m just trying to reconcile how that’s possible, I mean, I guess, you got about, give or take $115 million of income, I think, through the first five months. I don’t know if that number is exactly right, but something to that magnitude or maybe to more and somehow the book values declined. So I’m just trying to understand is it buybacks or is there some other accounting on the balance sheet that doesn’t get picked up or? I’m sorry.

Peg Broadbent

There were couple of -- two or three features. One is, the predominant one is the buybacks, the second of which was the depreciation of the pound sterling versus the dollar during the course of the quarter, which impacts our investment in our foreign subsidiaries, particularly our London broker dealer and the third of which is arguably an accounting anomaly and is a function of our year-end change as it relates to tax and is the difference between how we -- when we take a tax deduction for tax purposes and how we account for our tax deductions as it relates to stock distributions.

I can take you through each of those in a little more detail if you want. That final one will actually revert next year. And so there were a couple of features there including the buybacks.

Douglas Sipkin – Ticonderoga

Okay. That’s helpful and maybe just I mean a broader comment or color I should say, I mean, obviously it’s a choppy environment. It sort of seems -- correct me if I’m wrong like the demand for banking services is there. I just think you need a little bit more stability in the markets. Is that a fair statement?

Rich Handler

Yeah. I wouldn’t say the markets are closed. You have high grade issuance at almost a record high, the last couple of days in terms of coming back into the market. You have M&A activity really everyday. There are IPOs that were done in the last two weeks or probably more than have been done in a while. It’s just not as frothy as it was before. There is a functioning capital market in just about every single area.

Douglas Sipkin – Ticonderoga

Okay. All right. Great. Thanks for taking all of my questions.

Rich Handler

Sure.

Operator

Your next question comes from the line of Michael Wong with Morningstar Equity.

Michael Wong – Morningstar Equity

Hi.

Rich Handler

Hello.

Michael Wong – Morningstar Equity

I saw your press release the other day about the additions of the French rates business. Can you give an overall update on your European fixed cash income, foreign exchange and interest rate swap trading capabilities and anything about the proportion of income?

Peg Broadbent

As Rich actually mentioned earlier, we don’t have any Fixed Income derivative market making capabilities or foreign exchange market making capabilities. So we do use plain vanilla interest rate derivatives to hedge up our cash inventory but to the extent that we don’t actively use those products to make money. To all intense and purposes, the answer is arguably zero but clearly there is the P&L impact from the hedges that we put on to hedge up our Fixed Income cash inventory.

Michael Wong – Morningstar Equity

I guess I asked about the European cash Fixed Income trading business that you have?

Peg Broadbent

In Europe, we are active in the corporate credit space both high grade, high yield and also loans. We’re a primary dealer in a number of the Euro country bonds. We trade in the mortgage space and in the emerging markets, a fairly full effort on the cash side.

Michael Wong – Morningstar Equity

Have you seen a large pickup in the past quarter or two and any color in terms of as a percentage of total income or growth of that category versus several quarters ago?

Rich Handler

We don’t really break it out. What I would note to you is that in the primary dealer space, as we’ve announced over the last six months we’ve only recently become primary dealers in various of the Euro countries. So that’s a business that has been ramping and growing for us. Similarly, you’ve seen announcements where we continue to hire and build out our corporate credit businesses. And our Euro mortgage business is a relatively new business of the last four to five quarters and that continues to develop. So there is good development there. We haven’t broken out the numbers.

Michael Wong – Morningstar Equity

Okay. And your Fixed Income and commodities revenues line has been fairly stable over the past three quarters. Do you believe that’s a fairly normalized rate or do you believe that there’s still maybe some net interest spread or excess Fixed Income trading margin compression some time in the foreseeable future?

Rich Handler

I think we believe that there is still opportunities for us particularly on a global basis to gain market share. And we also believe that the trading markets in some of the recent periods were not as necessarily robust as in other periods. So there’s also some cyclical opportunity from period to period.

Michael Wong – Morningstar Equity

Okay. And in terms of, I guess, interest revenue and growth of your balance sheet, can you give any color around what you see on, I guess, possible the yield you have on your assets and the funding costs going forward?

Rich Handler

In terms of the growth of our balance sheet, first of all our balance sheet actually came down by about $1 billion from the end of the last quarter. In terms of the funding costs that are associated with the long-term capital that we have supporting that balance sheet, we have a large amount of long-term debt which has a long tenure and we don’t anticipate any particular changes to our funding costs in the near future.

Peg Broadbent

And all of that long term debt is fixed rate.

Michael Wong – Morningstar Equity

Okay. Is it about -- your net interest revenues have been fairly robust since the second quarter of 2009?

Peg Broadbent

Yeah. Actually it was encouraged uses of our financial information not necessarily to single out the interest line items on our balance sheet or on our Income Statement --excuse me -- but to focus more on the net revenue numbers. And the reason for that predominantly is because as I indicated earlier we hedge up a lot of our Fixed Income inventory with derivative product and the way in which the accounting works for derivative product is that all of the P&L associated with those derivative hedges goes to principal transactions albeit that there’s implicit net interest built into those contracts. And that somewhat distorts the net income numbers, the net interest numbers that you see in the Income Statement.

So I wouldn’t necessarily read anything into the net interest numbers. It’s how the GAAP accounting works. And on that basis, I’d just encourage you to look at the trends of the net revenue numbers.

Michael Wong – Morningstar Equity

Okay. And maybe just two quick more questions. Your credit underwriting and advisory revenues have been doing well lately. Can you talk about what you’ve seen with investor risk appetite for high-yield offerings and if you’ve seen anything in the leverage buyout area?

Rich Handler

Clearly, May was aversion towards risk and the deal flows slowed down as the market backed up. There’s still demand for high yield securities. There’s still demand for well structured transactions that are priced appropriately. And I think our market is relatively healthy.

Michael Wong – Morningstar Equity

Okay. And just last question. As you’re not a bank holding company and you may have some advantages over some of your larger peers, have you already started to expand into those areas where you believe some of your larger peers may have their hands tied or are you taking a wait and see approach at the moment?

Rich Handler

We’re looking for talented people across the spectrum. And we have been for much of our history and in particular last two years. We’re not focusing on where our competitors can’t go. We’re focusing where the best people are that we can attract to our platform.

Michael Wong – Morningstar Equity

Okay. Thank you.

Rich Handler

Thank you.

Operator

Your next question comes from the line of Casey Ambrich, Millennium Partners.

Casey Ambrich – Millennium Partners

Hi. Thanks very much for taking the question. Just a quick one, you guys talk about just want to dial in on the leverage a little bit. It looks like the assets were flat for the quarter but the average assets were up 17%. Is that right?

Rich Handler

That’s correct. When we say up 17%, we say the average was 17% higher than the amount at period end. It’s not necessarily 17 up on the prior quarter because week to week you’re going to have fluctuations.

Casey Ambrich – Millennium Partners

So at the period end though, the balance sheet was 17% lower than during the period, right? Why would that be?

Peg Broadbent

No, what we said was that the average for the period was 17% higher than the period end.

Casey Ambrich – Millennium Partners

I understand that, so why would the balance sheet close at the smallest amount during the quarter?

Peg Broadbent

It isn’t necessarily the smallest amount. It’s below the average.

Rich Handler

If you looked at our previous five quarters that we told people, sometimes it comes in below, sometimes it comes in above and the vast majority of the balance sheet is in -- of the expansion has been in treasury overlay securities whether it be U.S. or European.

Casey Ambrich – Millennium Partners

And then just a question again on the repo. It looks like the repo right now, well this is as of the last -- this is as of the Q, maybe you can update these numbers but repo right now is $13.9 billion and your tangible equity is about $1.9 billion so it looks like back -- where that’s 700%. When I looked at Lehman and Bear, they took repo to tangible equity about 400% to 500%. So what are you guys seeing in terms of this strategy that didn’t work for Lehman and Bear?

Peg Broadbent

Well, I mean, you can evaluate what didn’t work for Bear and Lehman and what we look at is liquidity and our comparison to what we’ve seen with others and the lessons one can take from the last couple years is that it is all about liquidity. It’s not about some of the ratios you’re citing, what it’s about is the mix and the liquidity. We have a comparatively tiny proportion of Level 3 assets. We have a much, much higher proportion than any of those of highly liquid.

So when we talk about the meaningful changes in our balance sheet levels coming from the government bond side as I’m sure you appreciate, those are highly leveragable, they are highly liquid, they are easily moved in and out. We’re matching the liabilities to our assets well. We’re maintaining a substantial cash cushion. We raised 430 million of equity in 2008. We raised over $1 billion of long-term capital in 2009. So those are all differences between us and Bear or Lehman or anyone else.

Rich Handler

I would just add one more thing. Our debt to equity ratio is around 1.25:1 versus 5:1. Our gross leverage is nowhere near there. I mean, we didn’t go out and buy a commercial Real Estate business. Your comments are just way off.

Casey Ambrich – Millennium Partners

Okay. Thank you.

Rich Handler

Thank you.

Operator

Your next question comes from the line of Daniel Harris with Goldman Sachs.

Daniel Harris – Goldman Sachs

Good morning, guys.

Rich Handler

Hi.

Daniel Harris – Goldman Sachs

How do you think about an ROE target or an ROA going forward from here as we sort of settled down from last years very robust Fixed Income markets, in terms of what opportunities you see going forward?

Peg Broadbent

Not being a bank, frankly ROA is not a high priority for us. We’re looking at operating margins and we’re looking at ROE. And our belief is that we can improve upon even the results that we’re delivering now although what should be recognized is that we have consistently and we continue to invest in the business.

And investing in the business for us generally means hiring people and building out both front office as well as support capability. And there’s going to be some drag on our results while we do that but we believe it’s a very, very worthwhile effort in respect of long-term growth. So the answer is our focus is on ROE and our goal is to get it above where it is today.

Rich Handler

By the same token, we think a midteens ROE over a sustained period of time is a very good result.

Daniel Harris – Goldman Sachs

Okay. So midteens is what you guys want to get to and that’s across the cycle?

Rich Handler

For as long a period as possible.

Daniel Harris – Goldman Sachs

Okay. In terms of some of the things you’re seeing in the Investment Bank, obviously we had a period as you guys mentioned there was some frothy activity earlier in the year. When you’re talking to CEOs or Boards today, how is their confidence level versus what it was earlier this year and how do you think that trends through the summer especially given some of the issues going on in Europe?

Brian Friedman

You know, I think most corporate executives in some ways reflecting our own experience on Wall Street. They’re coming out of a period where there was huge systemic issue. They’re coming out of a period where there was significant economic challenge. Depending on the business, I think you’ve got middle-to-better levels of visibility.

The result is that most executives are back thinking about growth and when they’re thinking about growth and this has been the history for many decades now. Inevitably, companies that want to achieve better than industry growth need to be thinking strategically and that obviously fits into the services we can offer to help them and both on the advisory side as well as capital.

And the answer is the dialogues are up dramatically from where they were clearly a year ago and even six months ago. And it portends for continued activity although there will be fits and starts based on the markets as well as based on events in the world.

Daniel Harris – Goldman Sachs

Okay.

Peg Broadbent

I would just add that during the very difficult period a lot of companies cut their costs to the bone with a relatively decent capital market. They’ve raised a lot of capital. So there’s a confidence level that we’re not going back to a systemic risk environment. People are looking to add value.

Daniel Harris – Goldman Sachs

Okay, thank you. On the Fixed Income side, can you point out which areas were sequentially better than the first quarter and then maybe other areas that had a tougher time?

Rich Handler

I think just generally, there wasn’t like one area that particularly well and the rest of them were pretty weak. It was generally decent across the board. I think the better ones were on the mortgage side, high yield with May was a little more challenging. Treasuries, international Treasuries was solid, domestic was decent, the rates all in all especially with the European presence became a lot of traction there.

Peg Broadbent

I’ll take a shot. Any update on how you think the early part of June is going from banking or trading?

Rich Handler

I think we said before, May was very, very sloppy. June, you could look at the markets as well as we can. It looks like two days ago or yesterday we’ll be back in business in terms of a robust market and the next day it’s not the case. So it’s clearly choppy but it’s an environment we can navigate in.

Peg Broadbent

Okay. Thank you.

Operator

Your next question comes from the line of Lauren Smith with KBW.

Lauren Smith – KBW

Hi, good morning.

Rich Handler

Good morning.

Lauren Smith – KBW

We’ve covered a lot of stuff, just one or two quick ones for me. I’m just curious if you could give us some color on your prime brokerage business, how that’s progressing and growing and you guys choosing to go self clearing? Is that in part owing to maybe some strong growth coming out of that business?

Peg Broadbent

Obviously, two separate questions. On the prime brokerage side, our growth has really been very steady for the past year. We continue to add clients. We continue to have growth in the clients and being an integrated firm who can both provide them with the prime brokerage services as well as serve as an execution firm for them, we’re getting good take up.

On the clearing side, it’s absolutely the fact that we have confidence in the business as we’ve seen good growth after we entered several of these businesses such as the primary dealerships. And so yeah, it’s efficient for us to bring all of that in house.

Lauren Smith – KBW

Okay. Great. And then what’s left on your buyback?

Rich Handler

Peg, do you have the number?

Peg Broadbent

I think it’s in the order of about $7 million or $8 million.

Lauren Smith – KBW

Okay. Great. Thanks and then just last one for me, sort of higher level. Maybe your thoughts on Asia and you guys have, we’ve seen you’ve added some folks there but maybe just bigger picture and what you’re looking to do there over the next 12, 24 months because clearly Europe relative to Asia is a much bigger business for you guys?

Peg Broadbent

Yeah. We’re extremely pleased with the architecture and the team that we’ve built out in Europe. We’re going in the direction we want to be in Europe and we think we have a bright opportunity.

In Asia, we’ve started to fill out the sales and trading side in Fixed Income. And we have some Investment Banking teams. The opportunity for us is clearly to build out in the equities area. It’s something that we are focused on. And I think in the time frame you’re suggesting we should be successful in getting to a more robust position in Asia.

Lauren Smith – KBW

Okay. Great. Thank you.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer & Company.

Chris Kotowski – Oppenheimer & Company

Hi, just a quick follow-up. I’ve heard you used the phrase that M&A dialog is at a strong level or intensive level. And I’ve heard any other number of firms say that but I guess I feel like I’ve been hearing that for about the last six months now. And I’m just curious if you have a sense of what is the bottleneck? What’s the delay here because it seems like everybody wants to do something but they’re waiting for other people to go first? Do you have …

Peg Broadbent

Well, actually, I’m not sure that’s the case. I think that, I don’t think that there’s a great bottleneck because in fact and this goes back I can’t even remember three or four quarters ago. If you go back to last summer or early fall in 09, you started to have a couple of marquise names do deals and if I’m remembering correctly, IBM announced an acquisition, I forget if it was in the summer or in the fall. In my view that was one of the kickoff kind of deals you have in a cyclical recovery because you’re right that people don’t always want to be the first one out of the box with an M&A deal.

But there’s no question, we’re back in a world where people are transacting. As far as the question of overall levels, I think the big thing that hasn’t happened is the broadening of financial sponsor activity. Corporate activity is good. In our case, I think we’ve grown significantly our market share in corporate M&A activity and that’s what you’re hearing from us.

I think on the financial sponsor side, there’s still a dramatic amount of capital in dry powder and while sponsors are becoming more active and they’re becoming fairly creative in the way that they are investing and acting, the example is east resources, the company that we just advised on the sale to Royal Dutch Shell. It was only a year ago that we were advising them in a capital investment by KKR.

So you’re seeing different kinds of transactions from sponsors but I think if you’re comparing it particularly the ‘06, ‘07 level, the big missing piece or the big difference, because I’m not sure it’s going to necessarily come back to the same place is the lower level of sponsor transaction activity.

Chris Kotowski – Oppenheimer & Company

All right. Thank you.

Operator

At this time, there are no further questions. I’d like to turn the call back over to Mr. Handler for closing remarks.

Rich Handler

Thank you everybody for listening to our call and have a nice day. Bye.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Jefferies Group Inc. F2Q10 (Qtr End 05/31/2010) Earnings Call Transcript
This Transcript
All Transcripts