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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.

Jim Warner - Carlton Capital

Meredith Ann Whitney

Jeffrey Harte - Sandler O'Neill + Partners, L.P.

Steve Stelmach - FBR Capital Markets & Co.

K.C. Ambrecht - Millennium Partners

Douglas Sipkin - Ticonderoga Securities LLC

Daniel Harris - Goldman Sachs Group Inc.

Jefferies Group (JEF) Q2 2011 Earnings Call June 21, 2011 9:00 AM ET

Operator

Welcome to the Jefferies 2011 Fiscal Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. A press release containing Jefferies 2011 fiscal second 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 2, 2011, and Jeffries Form 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 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' second quarter results. I am Rich Handler, CEO of Jefferies. With me on the call today are Brian Friedman, Chairman of our Executive Committee; and Peg Broadbent, our Chief Financial Officer.

For the 3 months ended May 31, 2011, we posted net revenues of $727 million, net income to common shareholders of $81 million and earnings per share of $0.36. Net income would have been $87 million, and EPS would have been $0.39 without the charitable contribution and the Bache acquisition costs.

Our results reflect our continued momentum in Investment Banking where we posted record quarterly results of $328 million and the durability of our Sales and Trading platform despite the challenging market environment that persisted throughout the quarter. Secondary trading activity was muted as investors were concerned about the state of the global economy and sovereign credit risks. With first half revenues of nearly $1.5 billion and EPS of $0.80 without the $0.02 in unusual items, it is clear that we are continuing to strengthen our market position and becoming an ever more important partner for our clients.

While we have much work to do, we are pleased with our team, our strategic position, our diversified business mix and our integrated approach to delivering one firm for every client's benefit. As we begin to integrate and expand the Bache platform we are scheduled to acquire on July 1, our growth initiatives now also include futures execution and clearing, foreign exchange, as well as commodities Sales and Trading. The existing Prudential Bache business is profitable and had annualized net revenues for the first 5 calendar months of 2011 of over $220 million.

We have believed for some time that regulatory changes taking place in the futures and derivatives markets will drive these businesses toward our client-focused business model. Based on this fundamental belief, we announced last October the establishment of the Jefferies Futures Division and the hiring of Patrice Blanc, the former CEO of Newedge, the world's largest futures commission merchant to lead Jefferies into this business.

We subsequently agreed to acquire Bache for tangible book value, which we believe is an attractive price for a full service platform with a significant customer base and market position. As a leading clearing and executing broker and listed derivatives of all major futures and options exchanges globally, Jefferies Bache will position our firm to rapidly implement and accelerate our strategy. Bache's strength in listed commodity derivatives, foreign exchange, base metals and precious metals trading are complementary to Jefferies existing platforms. In both financial futures and commodities, we're adding new capabilities to serve our clients in the highly liquid and transparent markets.

When we closed the Bache acquisition, which we expected at the end of next week on July 1, we will add 430 employee-partners in New York, Chicago, London, Hamburg and Hong Kong. We look forward to welcoming them and Bache's clients to the broader Jefferies platform.

Immediately following our early April announcement of the Bache acquisition, we raised $1.3 billion of additional long-term capital including $500 million in common stock and $800 million and 5 1/8% 7-year senior notes. A portion of this $1.3 billion in new capital will be used to fund the Bache acquisition and support the growth of those businesses with the balance to be used over time to further support the working capital needs of our existing businesses.

In addition, we expect to put into place a multi-year committed bank revolving credit facility to support Jefferies Bache's day-to-day inventory and liquidity requirements. From time-to-time, we take advantage of attractive opportunities in the market to raise capital to maintain significant liquidity at all times and a strong long-term capital position. We closed our first half with $8.2 billion of long-term capital and $2.5 billion of cash.

Now I'd like to it turn over to Peg to discuss our results and financial condition in more detail.

Peregrine Broadbent

Thank you, Rich. As Rich said, our net revenues for our second fiscal quarter were $727 million, an increase of 9% over the second quarter of 2010 despite a less robust trading environment. Our net income to common shareholders was $81 million and earnings per share of $0.36 compared to $84 million and $0.41 for the comparable quarter of 2010. EPS would have been $0.39 without the $0.03 negative impact of our substantial contributions to the relief efforts in Japan, as well as the out-of-pocket costs incurred through May 31 in connection with our pending acquisition of Prudential Bache.

Our second quarter earnings per share computation is based on a diluted weighted average of 250 million shares outstanding during the quarter, compared to just over 200 million average outstanding shares in both the first quarter this year and the year-ago comparable quarter. The increase is primarily attributable to the additional 20.6 million shares we issued in early April and were outstanding for almost 2/3 of the quarter.

Investment Banking revenues were a record $328 million, an increase of 28% over the then record second quarter of 2010 of $328 million. Capital Markets revenues were $184 million, and M&A and advisory revenues were $144 million. Fixed Income net revenues of $223 million were 2% above our second quarter 2010 results of $218 million. Equities net revenues for the second quarter were $165 million, down from the quarterly record of $180 million for the second quarter of 2010. Asset Management revenues for the quarter were $11 million, slightly down from the $14 million reported for the second quarter of last year. As seen last quarter, revenues in this segment will vary from period-to-period, primarily as a function of incentive fees recognized in each period.

Our non-compensation expenses, excluding $4.6 million donated for the Japan earthquake relief and $4.8 million in Bache acquisition-related costs, were $151 million versus $138 million in the second quarter of last year. The increase is primarily in technology spending as we continue to invest to support and enhance our expanded global Sales and Trading platform. Our compensation expense accrual for the second quarter was 59.4% of net revenues versus the 58.4% recorded in the first quarter.

The changing mix of revenues for the quarter when compared to the first quarter of the year and our continued investments in our firm to drive growth results in slightly higher compensation ratio. We repurchased 158,000 shares during the quarter, all in connection with employee share vesting tax payments. There remain roughly 9.5 million shares authorized for future repurchases.

Book value per share was $15.66 at quarter end based on 202 million shares outstanding. Our adjusted book value per common share was $14.70 based on 228 million shares outstanding, including restricted stock units. We estimate that our total assets were $41 billion at May 31. We estimate that our average balance sheet during the most recent quarter was about 15% higher than the quarter-end amount. Please note that Bache's inventory and other assets, which will be consolidated onto Jefferies' balance sheet as of July 1 aggregate to approximately $5 billion. We estimate our quarter-end Level 3 assets after accounting for noneconomic interests were approximately $483 million or about 3% of our total assets at fair value. Bache's inventory does not include any Level 3 assets.

We estimate our average bar for the quarter was approximately $12.7 million versus $10.5 million in the first quarter. Our tax rate for the second quarter was 35.1% versus 37.4% in the first quarter of 2011. The lower tax rate is primarily attributable to a change in the mix of pretax profits by business line and region. Excluding the future impact of Bache and assuming no major changes in the mix of forecasted profitability, we anticipate a tax rate going forward of about 37%.

At quarter end, we had a total of 3,222 employees, a net increase of 140 people since the end of the first quarter. This reflects the continued expansion of our global equities platform outside the U.S. primarily in Asia, growth in Investment Banking and the continued build out of the infrastructure acquired to support our global Fixed Income and Equities Sales and Trading platform. Pro forma for the closing of the Bache transaction, we would have had a global head count of about 3,650.

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

Brian Friedman

As Peg indicated, Investment Banking net revenues were a quarterly record of $328 million, an increase of 28% from the $256 million generated during the comparable 3-month period last year. Our Capital Markets revenues were $184 million, with debt capital markets generating $132 million and equity capital markets, $52 million. Debt Capital Markets were especially strong in the second quarter given the attractive financing terms that persisted throughout the quarter. Our backlog for both debt and equity capital markets remain strong and broad-based, but conversion and realization of this backlog is, as always, subject to market conditions and other factors.

Our continued success in growing our Capital Markets results reflects the strength of our Investment Banking coverage efforts, as well as our formidable distribution capabilities across all products. During the quarter, we completed 124 Capital Markets transactions. 100 of these were debt deals, 56 of which were book run. The other 24 Capital Markets transactions were equity offerings replacements, of which 21 or 88% were book run.

We are going to highlight a small cross-section of transactions that we closed this past quarter. Please bear with us as we believe this list will give you a sense of our overall breadth and momentum in Investment Banking and Capital Markets. Some notable debt deals include our acting as sole book runner for a $285 million acquisition financing for Kratos, sole book runner for a $325 million restructuring in senior notes offering for Satélites Mexicanos, a $400 million senior notes offerings for CNL Lifestyle Properties and our serving as sole book runner for a $225 million senior notes offering for Vantage Drilling.

We continue to increase our leverage loan origination activity through Jefferies Finance, our corporate lending joint venture with MassMutual, closing 16 deals in the second quarter, 15 of which were lead arranged. Notable Jefferies Finance transactions this past quarter included acting as joint lead arranger for a $360 million senior secured credit facility used to fund the acquisition of Henry's Farmers Market by Jefferies client, Sprouts Farmers Market, as well as acting as sole lead arranger for $260 million in acquisition financing in connection with H.I.G. Capital and Surgery Partners; $214 million acquisition of NovaMed, where Jefferies acted as sole financial adviser to the acquirer.

Notable equity deals included our serving as lead book runner for a $130 million follow-on offering of REGAL, joint book runner for a $120 million IPO for Thermon, joint book runner for the $855 million Renren IPO, sole agent for a $200 million private placement for General Maritime and lead book runner for a $370 million IPO for CFR Pharmaceutical.

Our M&A and advisory revenues were $144 million for the second quarter, nearly twice the $73 million we reported in the comparable period a year ago. M&A activity continues to be strong as companies pursue strategies for growth and financial sponsors continue to deploy their available capital.

Notable Jefferies M&A assignments included advising our client, Chesapeake Energy, on its $4.75 billion sale of its Fayetteville Shale assets to BHP Billiton; the $3.1 billion sale of senior housing communities by our client, Ventas, to Altria Senior Living Group; the $1.5 billion acquisition of Patne Computer Systems by our client, iGATE Corporation; the $3 billion sale of a portion of our client Statoil's Peregrino offshore field to Sinochem Group; and then a transaction in the enterprise software space valued at nearly $2 billion, Jefferies advised Apax Partners on its acquisition of Epicor Software, which Apax is combining with Activant Solutions for which Jefferies served as the financial adviser in its sale to Apax.

The notable deals just mentioned include transactions from various sectors, including aerospace and defense, health care, industrials, energy, real estate, shipping, telecom and technology. In addition, our mortgage and public finance primary businesses continue to perform well. Also of note, we still have a number of new senior investment bankers that only recently joined us and whose revenue and productivity, we believe, is in the early stage of ramping up.

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

Richard Handler

Thanks, Brian. Our Fixed Income revenues were $223 million for the quarter, up 2% as compared to $218 million a year ago, but down from the very strong $318 million reported for the first quarter of 2011. Strong performances from our European Fixed Income businesses and our U.S. Municipal business were not enough to make up for the overall impact of muted secondary trading volumes that negatively affected most of our U.S. Fixed Income businesses during the quarter when compared to our first quarter results.

We have continued to add talented professionals to our Fixed Income business, particularly in corporate bonds and rates. We are excited about the positioning and prospects of both those businesses. Our equity revenues were $165 million for the quarter, down from the $180 million reported in the second quarter of 2010 and the $177 million reported in the first quarter of this year.

Our European Equities business continues to develop and grow and the Securities Lending business was as seasonally strong. We are continuing to grow our global equities footprint and product offering to our existing and new clients by expanding our equity derivatives and Electronic Trading businesses into Europe, as well as continuing to build our capabilities in the Asian markets. We see these efforts growing in the second half and beginning to achieve some scale next year.

We believe Jefferies is in a unique position today. We are exceedingly proud of the capabilities and character of our soon-to-be 3,650 employee-partners. We operate on a solid foundation of long-term capital. Our products, services, industry teams and geographic presence have never been stronger or more diverse. We have invested heavily in our support infrastructure throughout our organization. Our culture is entrepreneurial, team oriented and client focused. The financial crisis of 2008 and 2009 was brutal and will remain seared in our individual and collective memories forever, a constant reminder that it is our responsibility to stay true to our historical commitment to rational leverage, a transparent and highly-liquid balance sheet and a strong foundation of truly long-term capital in the complete absence of arrogance or entitlement anywhere in our firm. Our clients come first in everything we do as we properly balance the respective needs of our shareholders, bondholders and employee-partners.

Thank you. And we are now available for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Douglas Sipkin of Ticonderoga.

Douglas Sipkin - Ticonderoga Securities LLC

A couple of questions here. First off, obviously, impressive banking revenues. You guys have always talked about a little bit more operating leverage in that business than maybe in the Trading business. So I'm just a little surprised that the comp ratio was as high as it was. Can you maybe shed a little bit of light, sort of how we should think about comp ratio across the business segments?

Brian Friedman

It's obviously difficult because you have a mix of a lot of items. We are making significant investment and investment in our business is both in OpEx, as well as in comp. In Asian Equities, in the growth of our European Investment Banking and generally, in the growth of all of our businesses, we say it almost every quarter that there's a ramp to each hire that we make in the front office and inevitably, their support that's needed and sometimes, that support comes ahead of the development. So it's -- when you're in the high 50s, there's going to be some part of that incrementally that is driving that growth. I think, we believe that our comp rate will stay in and around where it is now for some additional periods until you get to a greater proportion of those businesses that we've just talked about maturing. We can't tell you when that is, but we think it is over the next number of quarters.

Douglas Sipkin - Ticonderoga Securities LLC

Okay. Great. That's helpful. And then just a follow-up. Obviously, you guys have made some progress towards improving your capital position, leverage, et cetera. Any color on sort of how you guys fit in this whole scheme of enhanced regulation for the financial services industry? Obviously, I don't think SIFI buffers are applicable for you guys, but maybe can you just shed a little bit of color of how you guys are thinking about either the opportunities or some of the things that you need to pay attention to as it relates to sort of the broader financial sector, which obviously, is going through massive regulation?

Richard Handler

Well, first off, the regulators are going to decide what to do, and so we can't really speak for them. We can just give you our opinion. Our opinion is, while we are a very important company in our minds and, hopefully, our clients' minds, it's hard to imagine that we are a systemically critical company in the world. We have 97% of our balance sheet is relatively highly liquid securities Level 1 and Level 2. We do not have a big derivatives over the counter exposure. We don't have $1 trillion balance sheet. And while we are important, we don't feel like we are connected into the infrastructure of large money center banks to the extent of others. Brian, you want to elaborate?

Brian Friedman

I think it's fair to say, and we've said this for a couple of years, that we saw no rationale to become a bank holding company. And if you look at the last 4 years and you look at Jefferies and how we went through this period, broker dealer regulation worked just fine. And we think that we can operate our business smartly. And for everyone's benefit and safely under broker-dealer regulation and with our expansion into the Futures business and commodities with the CFTC.

Douglas Sipkin - Ticonderoga Securities LLC

Great. And then just one final question and then I'll get back in the queue. I heard just anecdotally that the Prudential acquisition, while it was a good property for them, they candidly admitted that they underutilized it because it was so small as a percentage of the whole firm. Can you maybe shed some light on some of the things that you guys may able to deliver to sort of ramp that $220 million number that you're talking about over time?

Brian Friedman

Yes, and I would say, what you just described, we believe is correct that this was ancillary and not as directly core to Prudential. It is, we believe for us, a significant growth lag and logical and highly compatible to the businesses that we now have and very much focused on a client base that we like. The business that we're acquiring is probably best thought of as having 3 major components: the Commodities business, the Futures business -- the Financial Futures business and thirdly, the Foreign Exchange business. More than a majority of the current revenue stream comes from the Commodities side. On the other hand, the Foreign Exchange and the Financial Futures are significantly compatible with our existing Fixed Income in particular, as well as our Equity platforms. So we believe that we can grow the Foreign Exchange and the Financial Futures very substantially from current levels. Having Patrice on board to chair and CEO this effort, we think is incredibly important and valuable. So we see huge growth on the non-Commodities side, which is the smaller part of the business so that the ramp on that, we think, can be fairly steep once we get traction, which will take some time. On the other side, as everyone recognizes, Commodities has become a very significant asset class. The history on Bache, which is a rich history that goes back 100-plus years, is that it has been substantially focused on end users and industrials. We, on the other hand, have great comfort and great relationships, obviously, on the financial side. And we believe that working together, we can expand that Commodity business and broaden the customer base. So we see an opportunity for even the larger part of the business to grow maybe not at the rate that the others do, which started as smaller base will grow, but we see growth potential across it. We're going to close it, we expect, next Friday. It will take some time to get the integration, communication and the things that we need done to drive growth. But we're optimistic longer term that, that it becomes a more significant part of our firm.

Richard Handler

And I would just add that we are very excited about the leadership team throughout the acquisition. They are as excited about building the business in partnership with us as we are. So it should be a very exciting time for all of us.

Operator

Your next question comes from Lauren Smith of KBW.

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

Could you, Rich, just give us maybe a little bit more color on the trading side in terms, most specifically, on the fixed side. I mean, there's a lot of moving parts. And you did in your comments mention that the European platform was strong. Munis were strong, but they couldn't -- not enough to offset some muted volumes in other product areas. So maybe just a little additional color there and maybe also specifically with respect to high yield, were there negative marks on any of your strategic positions that you hold that might have helped drive that number down on a sequential basis?

Richard Handler

There weren't any real specific negative marks. I think the general climate, pretty much throughout the quarter, was one of clients being uncertain of direction of positions and basically not being very active on the trading side. And as a result, you just do not get the natural flow that we enjoyed during the first quarter. The various businesses -- no business had a very poor quarter. None of them -- they just not had a very exceptional quarter relative to the first one. It was everything from people worrying about the high unemployment, basically housing lingering, the grease [ph] in the papers every other day. It was a relatively disappointing period to be a Fixed Income investor. The volatility was lackluster at times and very aggressive at other times. So as a result, you wind up not having the normal flow. I mean, that's really what it was.

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

And each month -- were any month particularly weak or was it just sort of the malaise across the -- across every month...

Richard Handler

It was pretty much throughout the quarter.

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

Okay. And then maybe can we just touch on the balance sheet, period-end assets were just shy of $41 billion but your average assets for the quarter was significantly higher. I mean, you went from $42 billion average to $47 billion, but the period end didn't change that much. Anything you can add to that?

Peregrine Broadbent

Yes, the increase in intra-quarter balance sheet was really a function of opportunities that our Rates business had, particularly in Europe. So as the Rates business in Europe grew has continued to grow out, we were out adding sovereign inventory to our books. And indeed, as generally despite what Rich said about the lackluster environment, we did take the opportunity on the Fixed Income side to expand our client base and expand our product offerings. And on that basis, our inventory across most of our asset classes within Fixed Income, but particularly on the rate side, which worked out pretty well for us from a net revenue perspective during the quarter.

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

Great. That's helpful. And then not to be nitpicky, but in doing my math, it's $87 million net income and then you said average diluted shares were 215 million. I actually, come out with a number, an operating number, that would be actually a little north of $0.40. So am I missing something? I mean, you said operating is $0.39, but those numbers worked out to be...

Peregrine Broadbent

Yes, I mean, you talk to, I can certainly, Lauren, take you through the calculation in more detail after the call. But you have to take into account the impact of the preferred shares and what we do with those in terms of assuming that they convert into equity and backing out the interest component associated with those. So there's an impact to both the numerator and the denominator as a result of the preferred shares. So I can take you -- I'm making an assumption that they convert into equity. I can -- I'd happily take you through the calculation in more detail. But it's a bit more complex than just taking the 2 numbers that we cited and dividing one by the other.

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

Okay. That would be helpful. And I guess just last one for me. On the Asset Management fees, so the $16 million of management fees for the first quarter, I mean, so that included incentive fees? Is that what you were implying in some of your earlier commentary?

Peregrine Broadbent

Yes. I mean, if you recall in the first quarter earnings call, I indicated that the Asset Management revenues were very much driven by the incentive fees connected with our Zurich-based convertible fund. We accrue for that fee -- for the fees associated with all our Asset Management businesses including that one, and it performed extremely well during the course of the quarter. It was well above its hurdle rate during the course of the second quarter whilst actually assets under management grew, the performance returned to a little just -- a little above the hurdle. And therefore, we reduced that accrual somewhat during the second quarter.

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

Okay. So but in terms of just sort of seasonality, so it would be because yet convertible management fees were $10.8 million in both 1Q, as well as 4Q. So, I'm just trying to -- so when would those hit, typically? Would it be 4Q or 1Q? I'm just trying to get a sense of if there's any quarterly kind of trend that we need to be focusing on or is it?

Brian Friedman

No. There's no seasonality or trend to it. It is simply quarterly performance, and it's not random. It's the result of a good group doing a good job. But from quarter-to-quarter, it's going to fluctuate. So it's simply going to fluctuate.

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

Okay. Okay, great.

Operator

Next question comes from K.C. Ambrecht of Millennium.

K.C. Ambrecht - Millennium Partners

Just a question for you on the tax rate. How much do you think the tax has helped rate -- helped earnings this quarter, the 200 bps?

Peregrine Broadbent

The 200 bps was maybe 1.5%.

K.C. Ambrecht - Millennium Partners

Okay. And then, is there any way you guys can give us a quarterly kind of -- I'm sorry, monthly progression of earnings? Just so we can get to figure out how the quarter started versus how it ended?

Richard Handler

I think we pretty much said it was balanced throughout the quarter.

K.C. Ambrecht - Millennium Partners

Okay. And then if just on the FICC, May was like -- I'm just trying to understand, make sure we understand the company. May was like a record issuance. I think there's $50 billion issued. So should we look at -- when we think about Jefferies and high-yield issuance, should we think about, should we look at the issuance, or we should think about more about the trading?

Brian Friedman

Well, recognize that our FICC reporting line is 100% secondary activity. All of the primary revenue, all of the revenue from underwriting and placements is in the Investment Banking line. So there's nothing in the FICC line from primary. The only direct relationship that one could draw on it, and it's probably too distant to actually draw very distinct conclusions from is that in periods of greater issuance, secondary activity tends to be a bit more muted. And this quarter would be an example of that, that when there is a more robust high yield and general Fixed Income pipeline of new issues, people tend to trade a bit less in the secondary markets unless there's volatility or other factors coming into it. So there is that kind of correlation, but that's about the only thing you can draw from it.

K.C. Ambrecht - Millennium Partners

Perfect. I appreciate it.

Richard Handler

Thank you.

Operator

Your next question comes from Meredith Whitney of Meredith Whitney.

Meredith Ann Whitney

I have a general question, structural and then related to the industry and your peers, which is the rest -- I know you've been in big build out mode. Obviously, you've had a big transition ahead of you in terms of the 430 employees you're integrating. What are you doing terms of opportunistically with respect to the layoffs that are ongoing now, the teams that are available now? Does rehiring new teams become more cost effective? And could you talk about just what you think from a structural standpoint, the street looks like in terms of head count and efficiencies? I know that's a bigger question, but I'd love to hear your thoughts on it.

Richard Handler

Well, starting at Jefferies, we have areas of our investment bank where we don't yet have the scale that we want. So what I would say on a truly very selective basis, we are hiring. I'm not sure that layoffs at other firms are relevant to that. We're looking to bring in the best in each of these sectors, and I'm not sure the best are being laid off. So Investment Banking, we've been hiring. We will continue to hire proportionally a little more outside the U.S. than in the U.S. We have a greater need to add in Europe, and we have a nascent opportunity in Asia over the next year or 2. On the trading side, in our Equities and Fixed Income businesses, our footprint is fairly clear, and our staffing levels are pretty good. There are always occasional openings that we will look to fill and occasional changes that we want to make, but we're in pretty good shape. Again, if we're going to be adding, it's not going to be because someone is laying off, it's going to be because we see a need or an opportunity, and it's generally going to come from the top of the class. So I would say that what's going on at other firms is not particularly relevant to our growth and our opportunity on the hiring side. It probably is relevant to our strategy where the extent to which other organizations narrow their focus or hone their focus, that often creates opportunity for us on the business level, and that we clearly do watch and we do go after. In terms of the bigger picture, we only know what we hear and see. I mean, there clearly seems to be some pressure on others to hone their models. And we think that's good for us. It's good for the industry. We believe that the consolidation and change that is coming about as a result of the crisis, as a result of changes in regulation and as a result of capital and other pressures, generally are going to create opportunity for us and are favorable. We can't predict it. We don't know what will happen, but we believe, over time, it creates opportunity such as when Prudential Bache is available for acquisition, and we buy it.

Meredith Ann Whitney

Okay. If I can just ask one last follow-up. In terms of giving a sort of competitive perspective, as you're -- some of your debt businesses are newer, could you argue that they are more efficient, less efficient in terms of build out, but more efficient versus legacy businesses? That may be an obvious, but if you could just elaborate on that, that would be helpful.

Richard Handler

Well, I think it's a combination of time and scale. There's no doubt, I mean, we've kind of proved it over and over again that it takes years, not weeks or months to reach maturity in a business. And some of our Fixed Income businesses, I mean, for example, we're sitting here in June. It's now only 2 years that we're a U.S. primary dealer. We're a primary dealer in various Euro-end countries for in most cases between 12 and 18 months. So those businesses are still in a growth phase, still in the acclamation phase, still on absorption phase in greater Jefferies. Our Mortgage business is closer to 3 years old and is more scaled further along. The Municipal business on the one hand, we acquired it, and had a long history. On the other hand, it's been at Jefferies now for not even 2.25 years and it's grown substantially in that period, and we've strengthened and expanded the head count and increased the quality of the Sales and Trading, and the results have come through. So I would say we have a lot of businesses that are still on the ramp. But the ramp is also impacted by the environment. So it's far from a straight line.

Operator

Your next question comes from Daniel Harris of Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

I want to go back to the Fixed Income numbers that you guys put out. And obviously, it was a weaker quarter from transactional. But I was wondering if you guys could think about from a quantitative perspective, how much of the decline owed to lower transactions versus a tighter bid-ask spread environment owing to the lower volatility?

Richard Handler

I mean, that's a -- it's a tough question to give the pinpoint answer to. I think the reality is spreads were relatively tighter, and activity was relatively slower. So it was just a more challenging environment.

Brian Friedman

I would just point out that in our first quarter, we had very strong results in Fixed Income. If you go back to last year, the strongest quarter was the fourth quarter where our revenue was $227.9 million. In this quarter, we're at $223.1 million. So almost comparable. So, I mean, keep in mind that this quarter, while down significantly from last quarter, is bigger than 3 of the 4 quarters last year and almost equal to the biggest quarter last year. So as we say, we're not shying away from our performance in trading. It wasn't that. It wasn't at the top end, but it wasn't bad at all in a period that wasn't good.

Daniel Harris - Goldman Sachs Group Inc.

Okay. Now that's helpful. You also gave some color around the backlog on Investment Banking. So 2 quick questions on that. One, is it higher or lower than it was last quarter? And then two, the quality of the conservations you're having with CFOs and CEOs, have they changed at all in the last few months with regards to uncertainty over the macro environment? Or do they generally still feel pretty good about opportunities but just are a little bit more cautious, specifically with regards to your international clients?

Richard Handler

We went into the quarter and are still in a position where our backlog is as strong as it's ever been since I've been at Jefferies in terms of the breadth, the product offerings, in terms of the variety of products and services, as well as the industry groups, is a very robust backlog and one that has the potential for a lot of very wonderful transactions and a lot of revenue and a lot of good deals. That said, the environment is -- everything depends upon the environment. And you could see in the high-yield market over the course of the last few weeks, rates have backed up, so that gives issuers pause and whether they need to act as the market or they want to wait. The IPO calendar goes from very hot to people being very nervous. The M&A environment is strong, and on top of all, is strong but that is subject to the market as well and then you throw the summer on top of it, and so there's a lot of issues there, cost returns.

Daniel Harris - Goldman Sachs Group Inc.

Okay. And then just last for me, you guys have obviously added quite a few people over the last year or 2 and certainly, you're attracting talent from across the street. I did notice that there was a number of people on your high grade team that moved out last week. I was wondering if you could put any color around that and if anything to read in terms of the shifting culture or any reason to why they might have left the firm?

Brian Friedman

If you look at our high-grade Corporates business, it's evolved from 10 or so years ago, a odd-lot somewhat electronic-oriented business to today, a full-service major effort in corporate credit. As you do that, things do change and people make decisions. And we make decisions. I think the simple way I would summarize it is that we feel very good about the team we have today. We feel very good about our prospects and our position for the longer term in the Corporate Bond business, and life goes on. We feel pretty good about it.

Operator

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

Jeffrey Harte - Sandler O'Neill + Partners, L.P.

How should we be thinking about buybacks going forward, given the capital raise and the Bache assets coming on, should we still be expecting dilution offset or are you potentially going to dial that back some?

Richard Handler

Well, the first thing we wanted to do is make sure we finance our acquisition with equity. We believe that a prudent balance sheet overall, while having some dilution is the best way to protect us over the cycles. And our statistics are relatively close to where they were today from before the crisis, which is in combination with that mindset, as well as the acquisition that's why we raised equity dollars. Our board does not like dilution. We do not like dilution. So we're going to be mindful of the environment, making sure our share count does not creep up too much, as well as making sure we have the earnings to support the buybacks, as well as all of the different cost returns we've talked about before. So we are focused on dilution. We want to raise the equity for the right reasons, and we're going to watch it going forward.

Jeffrey Harte - Sandler O'Neill + Partners, L.P.

Okay. Would you admit it, there's no necessarily a shift in your thinking on the buybacks?

Richard Handler

No.

Jeffrey Harte - Sandler O'Neill + Partners, L.P.

Okay. And just looking at kind of the level of non-comp expense, I know Bache comes on next forward, but the whole back office build-up and kind of the international expansion. Can you give us any insight as to how we should be thinking of that going forward coming from the $151 million kind of core this quarter?

Peregrine Broadbent

Yes, I said it in this call in the first quarter about 3 months ago that run rate was going to be in the 140-something million. The first quarter benefited from a couple of unusual items in our favor. I will still think that the run rate is going to be in the order of the high 140-something million. In terms of Jefferies as it is today, obviously, the numbers will change when Bache comes online, and we'll make it clear what portion of the operating expenses of existing Jefferies platform related to the expanded one when we get to the third quarter.

Jeffrey Harte - Sandler O'Neill + Partners, L.P.

Okay. Capital leverage. Nobody knows what the regulators are ultimately going to do or how things kind of plan out. But given that you're a primary dealer and the balance sheet's at least pushing the $50 billion mark, how do you kind of prepare for at least the possibility that you could be facing more strict regulatory requirements or anything? Even if you don't think that will be the case, kind of how do you to prepare kind of in the what-if scenario?

Brian Friedman

I mean, our understanding is that, first of all, the regulation is a little bit away, and it's still being defined, and there's been many different suggestions of how selections might be made. Further, we understand that the process would be a process. It wouldn't be a surprise or an instantaneous fact. So our expectation is that there would be discussion, and it's something we would have time to prepare for. Again, we believe it's less likely rather than more likely. And at this time, as evidenced, we don't have a $50 billion balance sheet and all the discussions that we've heard suggest that many factors beyond size will be relevant. And we believe a fair reading of those factors are again less likely to cause us to be in the mix. But we think there would be time to deal with it if we needed to and presumably we would find our way.

Richard Handler

But I think the general way we manage our business in terms of the leverage ratios, raising equity when appropriate, watching our Level 3 assets, all the things that we did that allowed us to survive this financial crisis without any assistance from anyone, those tenets are still in place as an organization. I believe that's the right way for us to run our company.

Operator

And your next question comes from Jim Warner of Carlson Capital.

Jim Warner - Carlton Capital

I have 2. First is you've spoke a bit about the Pru Bache acquisition. And my question really is a very simple one, is it accretive? And if so, when by and by how much? And the second question really is pro forma for the Pru Bache deal, which seems very attractive. In considering your comments regarding the ramping up of new managing directors, what is your new return on equity target for the firm?

Brian Friedman

Well, we've never given return on equity targets in the past, and we're not going to start now. We do believe that there is significant operating leverage in our existing platform, and we also believe that the Bache acquisition gives us further upside. So we believe that a combination of the maturation of our existing team and business model alone will increase our return on equity from where we are today if we were to actually enjoy a better operating environment, that would also contribute. So we think we can take our return on equity up from where we are today, combination of our own efforts, which is really market share gain, as well as, hopefully, a more favorable environment. As far as -- we've shied away also from making a claim on accretion or dilution with the Bache acquisition because it's partly going to depend on the rate that we invest in it. In other words, to the extent that we talked about 2 of the 3 businesses having significant growth, that's going to require some head count addition, as well as potentially some operating expense investment. As we fill that out, we'll have a sense of the increment of earnings that we can get. We clearly expect it to come fairly quickly, but we don't want to make a claim at this point for it's coming in one quarter or it's coming in 3 quarters. It really depends on some of those decisions that are yet being made as we work with the Bache management team and think together about the opportunity. Again, across Jefferies, we face this a lot. There's a significant trade off between short term and long term and in so many of our businesses with the changes in the environment and changes in the competitive set, we've got opportunity. We just have to decide where we're going to spend to get it.

Richard Handler

And I would just add that throughout the last 15 years, we made a series of acquisitions. All which we did not give estimates in terms of when they would be immediately accretive, all which turned into immediately accretive situations for us. When you buy assets at tangible book and you have a quality platform and quality people running those assets, it generally works out pretty well. And that's been our strategy over the last 15, 20 years from acquisitions.

Operator

And your next question comes from Steve Stelmach of FBR.

Steve Stelmach - FBR Capital Markets & Co.

Just real quick on the SIFI buffer. Clearly, those that are subject to the SIFI buffer, higher capital presumably lower ROEs, but also presumably lower cost of capital. How should we think about that relative to non-SIFIs and what businesses may be more less attractive with a relative cost of capital advantage or disadvantage for the non-SIFIs?

Brian Friedman

It's hard for us to answer sort of how other people view their cost of capital because they've got complex structures. We believe we're in businesses that, first of all, are interrelated. So not every business everyday gives you exactly the return you want. But as a group, they give us the return, and we believe they're connected and should be together. We believe that, and you can see it in our price of debt, and you can see it in our equity, we believe that we can earn our cost of capital plus and that our business model allows us to do that. We have some disadvantages. We have some advantages. And we can deal with both.

Steve Stelmach - FBR Capital Markets & Co.

Okay. But there's no real business line that sticks out as maybe perhaps less attractive post sort of SIFI buffers?

Richard Handler

It's hard for us to answer that question.

Brian Friedman

Yes, I mean, again how -- we are built -- recognize that we don't deal with consumer businesses. We deal with institutional wholesale-type businesses. Recognize that we deal substantially virtually entirely with customers as we're a customer-driven firm. So we're not particularly connected to other financial institutions. We're not deposit insurance driven. Our model is the traditional broker-dealer and now also FCM model, capital structures, leverage ratios, all the things that have worked for 100 years, and those models are working for us. Whatever issues came out of the crisis, generally came out not in the traditional broker-dealer capital model but in other capital models.

Steve Stelmach - FBR Capital Markets & Co.

That's fair. And then just one last one. You guys talked about a comp ratio that 58% kind of feels right for the next few quarters. Was that pro forma for Bache, or was that just legacy Jefferies?

Brian Friedman

We weren't talking -- we didn't actually cite a specific number, just to be clear. But we were talking Jefferies as it is today. But I would go a little further and say that Bache is not particularly going to cause an increase in our compensation ratio.

Steve Stelmach - FBR Capital Markets & Co.

Yes, that's helpful.

Operator

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

Richard Handler

Thank you, everybody. Have a nice day.

Operator

And ladies and gentlemen, that concludes the Jefferies 2011 Fiscal Second Quarter Financial Results Conference Call. We appreciate your time. You may now disconnect.

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