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Executives

Brian Friedman - Director, Chairman of Executive Committee and President of Jefferies Capital Partners

Richard Handler - Executive Chairman, Chief Executive Officer, President and Director of Jefferies

Peregrine Broadbent - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Lauren Smith - Keefe, Bruyette, & Woods, Inc.

Jeffrey Harte - Sandler O'Neill & Partners L.P.

Steve Stelmach - FBR Capital Markets & Co.

Douglas Sipkin - Ticonderoga Securities LLC

Daniel Harris - Goldman Sachs Group Inc.

Jefferies Group (JEF) Q1 2011 Earnings Call March 22, 2011 9:00 AM ET

Operator

Welcome to the Jefferies 2011 Fiscal First Quarter Financial Results Conference Call. [Operator Instructions] A press release containing Jefferies' 2011 fiscal first quarter financial results was distributed via Business Wire before the market opened today and can be accessed at 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 Jefferies' belief as to future performance.

They usually include the words 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 Jefferies' Transition Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2011, and Jefferies' Form 8-Ks 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 conference, Mr. Richard Handler, Chairman and CEO of Jefferies. Mr. Handler, you may begin your conference.

Richard Handler

Good morning, and thank you for joining our discussion of Jefferies' first quarter results. I am 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 first quarter ended February 28, 2011, we posted record net revenues of $758 million, net income to common shareholders of $87 million and earnings per share of $0.42. Q1 was our second most profitable quarter ever notwithstanding significant investment throughout our firm to drive future growth. We'll shortly review our results in more detail, and you'll note we achieved solid results across all reporting lines. These results demonstrate the strength of our platform, and we are optimistic about our long-term position we can achieve in our businesses.

Jefferies continues to track talented professionals who value our distinctive approach to serving clients in the Capital Markets and Investment Banking arenas, as well as the entrepreneurial one firm approach were we continue to foster throughout our global platform. We are continually adding to our capabilities and geographic presence across our firm. Our strategy and our opportunity are clear, and we intend to pursue them aggressively but with focus and with prudence.

We sense strong momentum today throughout Jefferies, and we will work tirelessly to enhance our ability to best serve our clients in the future. Now I'll turn over to Peg to discuss our results and financial condition in more detail.

Peregrine Broadbent

Thank you, Rich. Before we turn to our results, we would like to highlight one classification change within our revenues by source statement on Page 4 of our first quarter press release. At the beginning of our fiscal year, we internally aligned our Convertibles business in Equities and therefore, the results of this business are now included in the equity and equity Capital Markets lines or revenues by source statement rather than as part of our fixed income and debt capital market lines. Prior periods have been restated accordingly.

Now for our results. As Rich said, our net revenues for our first fiscal quarter was $758 million, an increase of 31% over the comparable quarter of 2010, which was the three months ended March 31, 2010. Our net income to common shareholders were $87 million and earnings per share of $0.42 compared to the $72 million and $0.35 for the comparable quarter of 2010.

Investment Banking revenues were $239 million, an increase of 21% over the first quarter of 2010. Of the $239 million, Capital Markets revenues were $113 million, and M&A and advisory revenues were $126 million. Fixed Income net revenues were $318 million, were 58% above our first quarter of 2010 results of $201 million.

Equities net revenues for our first quarter were $177 million, an increase of 2% over the $174 million recorded during the first quarter of 2010. Asset Management revenues for the quarter were $24 million, a substantial increase from the $7 million reported for the comparable quarter last year. The increase includes increased performance fees and increased assets from our global convertible Asset Management group.

Non-compensation expenses were $136 million, in line with last year's first quarter and prior quarter. Our compensation expense ratio for the first quarter was 58.4% of net revenues, consistent with the 58.5% recorded for our 2010 11-month fiscal year.

During the quarter, we repurchased 1.5 million shares at an average price of $25.47 per share. There remains roughly 9.5 million shares authorized for future repurchases.

Book value per share was $14.56 at quarter end based on 177 million shares outstanding. Our adjusted book value per common share was $13.35 based on 205 million shares outstanding, including restricted stock units. We estimate our total assets were $40.4 billion at February 28. We estimate our average balance sheet during our most recent quarter was about 5% higher than the quarter-end amount. We estimate our quarter-end Level 3 assets, after accounting for non-economic interests, were approximately $400 million. This still continues to be only about 2% of our total assets at fair value. We estimate our average VaR for the quarter was approximately $10.5 million higher than the $6.5 million reported in the fourth quarter but lower than the $11.2 million reported in the first quarter of 2010.

Our tax rate for the quarter was 37.4% versus 37.9% in the first quarter of 2010 and 39.4% for the 2010 11-month period. We ended the quarter with a total of 3,082 employees, virtually unchanged from the end of fiscal 2010.

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

Brian Friedman

Thanks, Peg. As Peg indicated, Investment Banking revenues were a very solid $239 million for the first quarter, an increase of 21% from the $198 million generated during the comparable period last year. Capital Markets revenues were $113 million, with Debt Capital Markets generating $63 million and Equity Capital Markets $50 million.

Our backlog for both Debt and Equity, as well as across all of our Investment Banking effort, remains strong. Our M&A and Advisory revenues were $126 million in the first quarter, more than twice the $62 million reported in the comparable period a year ago. M&A activities continue to be reasonably strong as corporates pursue strategies for growth and financial sponsors look to deploy their ample untapped commitments.

During the quarter, we completed 114 Capital Markets transactions. 82 were debt deals, and 40 of these were book run. The other 32 Capital Markets transactions were equity offerings or placements, of which 26, or 81%, were book run. The strongest sectors included health care, consumer and technology.

Three weeks ago, we announced two important strategic initiatives to further support our Capital Markets origination efforts. We and our long-term partners, MassMutual, doubled our equity commitments and jointly will provide a secured funding line to Jefferies Finance, which underwrites an agents’ loans to corporate clients and to support financial sponsor activity. This expanded capital base will allow continued growth for Jefferies Finance and should further drive our Corporate Investment Banking efforts.

We also announced the formation of Jefferies Loan Core, a similar joint venture with our new partner, the Government of Singapore Investment Corporation, to provide commercial real estate financing. If this market recovers and Jefferies Loan Core establishes its position, we expect to build a solid operating business, as well as participate in securitizations and other opportunities that will flow to Jefferies from this venture.

We want to highlight that we are pleased to partner with Mark Finerman, CEO of Jefferies Loan Core, and a well-established and longtime leader in the commercial mortgage origination business. We continue to believe in the long-term growth potential of our Investment Banking efforts in serving corporates, sponsors, sovereigns, local and state governments, real estate owners, mortgage financiers and other financial asset classes.

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

Richard Handler

Thanks, Brian. Our Fixed Income revenues were $318 million for the quarter, up 58% as compared to $201 million a year ago and up 40% from the $228 million reported for the fourth quarter of 2010. Every Fixed Income business, global rates, investment grade corporates, municipals, emerging markets, commodities and particularly high yield and mortgage-backed securities performed well during the quarter. Our Equities revenues were $177 million for the quarter, up 2% from the first quarter of 2010, which included the positive benefit of block trading opportunities during the year-ago quarter.

Equities revenues for the quarter were a 14% increase from the fourth quarter of 2010. We are continuing to grow our global Equities' footprint and product offering to our existing and new clients by expanding our Equities Derivatives Electronics Trading business into Europe, as well as continuing to build-out our capabilities in Asian markets.

We believe Jefferies is unique today in our intense focus on offering an integrated, global Capital Markets platform to our clients and an entrepreneurial culture to our employee partners. Every day, every trade and every deal must be earned by us in vigorous competition, but our business is growing on the backs of our talent and team, delivering ideas and execution to investors and issuers. We thank them all for their efforts and continued support, and we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Steve Stelmach of FBR.

Steve Stelmach - FBR Capital Markets & Co.

Good quarter obviously in the principal trading line. Presumably, you’re on top a little bit by higher leverage and higher VaR. Can you just give us a feel of your ability or willingness to lever up a little bit more? Or are you satisfied with where you are in terms of the balance sheet?

Richard Handler

I think right now, we are pretty much along the same ratios that we were going into the crisis in 2007, and those ratios proved pretty good at dealing with an ultimate stress test. So I think we're roughly around where we are comfortable.

Steve Stelmach - FBR Capital Markets & Co.

Okay, so don't expect it to go much higher or lower from here, sort of on par with history?

Richard Handler

I think we’re back to where we were before and we found a sweet spot for us.

Steve Stelmach - FBR Capital Markets & Co.

Okay. And then on the employee count, to read into that being essentially flat, is that just sort a brief hiatus on your growth plans, or that reflects the maybe near-term outlook in market conditions, just sort of slowing down the growth?

Richard Handler

I think it's more of a reflection on guarding policies of some of our competitors, as well as the fact that we have really put the lion's share of our investment in the last couple of years and we feel like, at this point, we're making selected additions as opposed to the whole scale hires that we had historically.

Steve Stelmach - FBR Capital Markets & Co.

That's helpful. And then last quick question, Brian, on the pipeline, what products or sectors are comprising the largest share of that pipeline right now?

Brian Friedman

I would say it's pretty broad-based. I mean, you're going to have lumps from quarter-to-quarter just because two or three deals in one sector cause a sector to stand out, so we tend to highlight the sectors that had stronger periods, and we highlighted a few minutes ago, that the Capital Markets. I'd say it's fairly broad and becoming ever more global.

Richard Handler

One last thing, I would also add on the banking. There's a variety of sectors that were basically newly engaged in that are coming online. So that's going to be something we'll be watching in the future.

Operator

Your next question comes from Daniel Harris of Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

I wanted to follow up on the fixed line. Obviously, a really good number there and much better, I think, than most people were looking for. And I appreciate some of the color before, but can you comment where did you see most of the strength? Was it in the build-out of the primary dealer businesses? Was it in the commissions in munis? Where did you see a lot of activity? Because from what we understood in December, it seemed like quantum flow was pretty slow and yet your number was for the opposite.

Richard Handler

I think, as we said in the call, it was pretty much across the platform. I do believe we're gaining market share throughout all of our businesses. It was always difficult to quantify, but we feel like we've seen that momentum from our clients. And our clients are telling us that we're moving up in terms of rankings in the counterparty in all of our businesses. More specifically, we had a strong mortgage business and a more strong high-yield business for the quarter, but it was really broad-based.

Brian Friedman

We also had, however, our best trading period in municipal as a business. This was our eighth quarter in the Municipal business and by far, our best. And we’ve also had reasonable performance in our Rates business, so it was pretty broad-based.

Daniel Harris - Goldman Sachs Group Inc.

Can you also comment a little bit on the FCM business that you guys are building-up and how things are going there? As well as what are you hearing or how are you guys addressing the changing regulatory environment with clearing, and how is that helping your business? Because I would imagine, that sort of levels the playing field for you guys a bit.

Brian Friedman

Just to be very clear, there is no revenue in our most recent quarter from the FCM side. We are still in the start-up phase, have not yet gone live. And so it's certainly there in terms of the impact on our recent results. There was none. We believe that the regulatory environment and the market direction in terms of competition is very favorable to what we have in mind in the FCM business. And as we roll that out, we have very high expectations of what our opportunity is. Watch this space, there'll be more information over the coming period.

Daniel Harris - Goldman Sachs Group Inc.

Okay, and then just lastly for me. On the income statement lines and I know that this is always a challenging one to read into, but the principal transactions were up meaningfully. Commissions were sort of flat sequentially, actually, the last few quarters. Is that just a function of how your Fixed Income business is being operated now more on the primary dealer side? Or is there anything else going on there?

Brian Friedman

I would not read principal transaction into more risk or more capital deployment grade. There is riskless principal transactions, there's agency transaction. I think the important thing to note is that it was really, for the most part, traditional every day, flow of business on the Fixed Income side as well as on the Equity side this quarter.

Operator

Your next question comes from Douglas Sipkin of Ticonderoga.

Douglas Sipkin - Ticonderoga Securities LLC

I just wanted to follow up a little bit on a couple of things. First off, can you maybe just talk about -- just on the theme of the question, I mean, how did sort of things trend in December, January, February because -- I hate to beat a dead horse -- but it just felt like December was such a challenging month, and it just isn't read through that. I mean was it that you guys just had seed strength at the turn of the calendar year, January, February where things really started to pick up again? Or is it really just performing well throughout the entire quarter December, January, February?

Richard Handler

I would just say good, good and good, which also translated to the first few weeks of our new quarter. And with the exception of the last few days, were some, clearly, some turmoil throughout the world which slowed things down. But generally, it's been pretty steady throughout the quarter and the beginning of this quarter.

Douglas Sipkin - Ticonderoga Securities LLC

Okay, great. And then maybe can you just comment on -- obviously, you guys are having some good success in M&A, some really good success. Some of your competitors have indicated that maybe there's a little bit more pricing pressure. Is that something you guys are seeing, working with or really not seeing that at all? It just seems like, because there’s a lot more boutiques pushing, pushing the envelope and moving with the league tables.

Brian Friedman

I don't think we've seen any broad pricing pressure. But there have been few instances where I personally particularly have seen the secondary firms cut price to get opportunities, but they're not opportunities that were priorities for us. So we're not particularly seeing pricing as a competitive pressure here.

Douglas Sipkin - Ticonderoga Securities LLC

Okay, and then finally, and if you addressed this previously I apologize, but can you just give like a headcount target or goal for this year? I mean, obviously, you guys have been expanding rapidly.

Richard Handler

We haven't had a headcount target in the 21 years I've been here. It's basically if we find great partners when it comes to our platform, who fit in and can leverage off of our platform, bring quality business, we'll hire them. And if we can't find them, we won't.

Operator

Your next question comes from Jeff Harte of Sandler O’Neill.

Jeffrey Harte - Sandler O'Neill & Partners L.P.

The Asset Management, the revenue there was up quite a bit. Can you tell us what was behind that? And can you tell us what the asset AUM was as well?

Peregrine Broadbent

The assets under management at the end of the quarter was about $3.2 billion, which was up significantly from the year end. At year end, our assets under management were about $2.6 billion. Most of that increase was driven by our European-based convertibles fund and the increased combination that flows into that fund, as well as the asset values increasing. And as I said in the prepared remarks, an extra fee, a large chunk of the revenues in Asset Management this quarter were attributable to that fund.

Jeffrey Harte - Sandler O'Neill & Partners L.P.

Okay. And across the board, I mean, we're seeing, whether it's trading, Investment Banking, and this has been touched on a couple of times, we're seeing the really strong revenue growth. Can you differentiate at all between Jefferies as bigger and better in a lot of businesses versus the kind of cyclical or kind of how the operating environment is progressing?

Richard Handler

I think if you look at the Fixed Income world in general, it is a very competitive, low spread, highly liquid environment that we're in right now versus 2009 when it was relatively easy to make money in the Fixed Income area. So I believe that's a reflection of increased market share and clients acknowledging us as an important counterparty and trading partner. I think in Equities, we've had significant investment throughout our platform where I think we're gaining traction there as well.

Jeffrey Harte - Sandler O'Neill & Partners L.P.

Okay. And then even on, like, the Investment Banking side as well, I mean, is it -- how much of it is -- is there really good Capital Markets that you guys are taking a bigger share of the pie versus just the franchise is so much better than maybe it was.

Brian Friedman

I don't think there's any question that we're in a much stronger position than we were, let's say, in 2007. In 2007, we had grown massively over the prior five to seven years. And today, if you take this quarter at a $240-something million, our best number in '07 was a $750 million year. If you take into account that the quarter ended February, December to February quarter is probably -- you never say for sure, but generally would be a seasonally slightly slower period because you tend to have less Capital Markets activity in the second half of December and the month of January. So when you look at our numbers, our investment bank has advanced meaningfully. I mean, very, very significantly from where it was in 2007. And if you look at it on a headcount basis, we actually haven't increased the headcount but we have in fact, increased the intensity of the activity and the quality of the activity. So I think we've taken meaningful share in investment banking, and I think you'll see that come through over the next number of periods.

Richard Handler

That's current performance. It’s not an indication of future performance?

Jeffrey Harte - Sandler O'Neill & Partners L.P.

And I guess, finally, when we look at just the non-comp line with a lot of the hiring expansions that's been going on, can you give us any insight as to how we should be thinking of that going forward?

Richard Handler

Of the top line?

Jeffrey Harte - Sandler O'Neill & Partners L.P.

Of the non-comp expense line.

Peregrine Broadbent

The non-compensation expense side, we've obviously worked hard during the quarter 2010 to contain costs, particularly in spaces such as operators and clearing costs. I would that there are one or two small benefits that we received. For example, our space and occupancy line this quarter, I would anticipate sort of $140 million type of figure on an ongoing basis on a quarterly basis. On the other hand, cost containment is still a priority for us. So we'll still work hard as we have done over particularly the last 12 months to keep the costs in line.

Operator

Your next question comes from Lauren Smith of KBW.

Lauren Smith - Keefe, Bruyette, & Woods, Inc.

Just a couple of quick ones for me, and just going back to the head count question, I think Daniel had that. So it's pretty much flat Q-on-Q but I try to track pretty closely all your press releases of hires that come out. So I mean, can we conclude that perhaps towards year end you might’ve had some headcount reductions of any sort?

Brian Friedman

Yes, you can obviously conclude that. I mean, we've continued to add and strengthen ourselves. And inevitably, there is going to be some turnover, and we're comfortable with the turnover that we've had and kind of pleased with the team as it continues to build. So the answer is yes.

Lauren Smith - Keefe, Bruyette, & Woods, Inc.

And there be any severance embedded in the comp line for the quarter?

Brian Friedman

Any severance would be absorbed. But it's not a meaningful number.

Lauren Smith - Keefe, Bruyette, & Woods, Inc.

And then would you have -- because I think you've given this to us before, or some directional, would you know what percentage of your Investment Banking entities have joined Jefferies, say, the past six or nine months? So when we all try to think about the potential ramping productivity, which can take anywhere, I guess, 18 and 24 months, just to sort of get a sense of the hiring there?

Brian Friedman

We don't have those numbers handy on the call, but we would be glad to give you a sense of that offline.

Lauren Smith - Keefe, Bruyette, & Woods, Inc.

Okay, that's great. And then I guess just one more on the Investment Banking. I know you've given it to us in the past, a number of leveraged finance deals that you did in the quarter?

Brian Friedman

We don't have it handy, but let me think if we can remember it. Don’t have it handy but we can get you it.

Lauren Smith - Keefe, Bruyette, & Woods, Inc.

And then just one last for me. Rich, I think in your opening comments where you made some commentary about Equities trading and you mentioned block trading, did you say that was this quarter or were you comparing it to the year ago?

Richard Handler

I was comparing it to a year ago. We were up a small percentage versus a year ago. But the year ago quarter did include some unique opportunities that we've highlighted at the time, this particular did not.

Peregrine Broadbent

Sorry, just to clarify, we're up little bit this quarter. And the reason we are up a little bit this quarter was because there's some block trading opportunities that we have this quarter. The core equity business based on that remark is similar to the year ago quarter.

Operator

And at this time, I'm showing no further questions. I'll turn the conference back to Mr. Handler for any further remarks.

Richard Handler

Thank you. We'd like to thank our clients and our employees for their efforts and allowing us to leverage Jefferies' global platform to collectively raise $5.25 million to benefit those citizens of Japan who have been so badly impacted by the recent earthquake and tsunami. It really speaks volumes about the quality and the humanity of our employees and our clients. And we're really privileged to be able to help with relief efforts even in this small way. Thank you for listening to our conference call. Have a good day.

Operator

And ladies and gentlemen, that concludes the Jefferies & Company First Quarter 2011 Earnings Conference Call. We appreciate your time. You may now disconnect.

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