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

Executives

Peregrine C. de M. Broadbent - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

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

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

Analysts

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

M. Patrick Davitt - BofA Merrill Lynch, Research Division

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

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

Michael Holton

Peter G. Kuechle - Frontier Capital Management Co., LLC

Jefferies Group (JEF) Q4 2011 Earnings Call December 20, 2011 9:00 AM ET

Operator

Welcome to the Jefferies 2011 Fiscal Fourth Quarter and Year-End Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. A press release containing Jefferies' 2011 fiscal fourth quarter and year-end financial results was distributed via Business Wire earlier this morning 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 these 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 Jefferies' Forms 10-Qs and 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 B. Handler

Good morning and thank you for joining our discussion of Jefferies' fourth 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 3 months ended November 30, 2011, Jefferies posted net revenues of $554 million, net income to common shareholders of $48 million and earnings per share of $0.21. Net income includes an after-tax accounting gain of $12 million as a result of applying U.S. GAAP debt extinguishment treatment to our broker-dealers' market-making transactions in Jefferies' debt. Net income also includes an after-tax reduction of approximately $2 million from expenses incurred relating to the Bache acquisition. Without these 2 items, our net income would have been $39 million or $0.17 per share. While we -- while these results do not reflect what we believe to be the long-term potential of our firm, in light of current market conditions and recent events, we are, in fact, very proud of these results and will elaborate on why in a few minutes.

Our investment banking revenues for the quarter were $261 million. Our trading results for the fourth quarter reflect the continued challenging trading conditions across global markets. Our trading results were also impacted by significantly curtailed business activity caused by the misinformation we experienced throughout November. The good news, though, is that our trading businesses have now returned to pre-November levels and our investment banking businesses continue to be solid.

For our fiscal year end November 30, 2011, we achieved record fiscal year net revenues of more than $2.5 billion, net income to common shareholders of $285 million and earnings per share of $1.28. Net income includes $41 million from the Bache acquisition gain, net of certain post acquisition expenses and $12 million relating to debt extinguishment treatment previously mentioned. Without these 2 items, our net income would have been $232 million or $1.04 per share.

Our record annual net revenues reflect a year that had 2 very distinct halves. For the first half of the year, our revenue run rate approached $3 billion per year and demonstrated the earning power of our platform. By contrast, the environment in the second half of the year was brutal, starting in early summer with the U.S. debt-ceiling crisis. Then August proved to be one of the worst months ever in the credit markets. The European sovereign debt market has faced extreme duress since early fall, MF Global declared bankruptcy in late October and if all this were not challenging enough, we concluded our year with Jefferies being the headline story for most of November.

There were many reasons why we were able to navigate this 6-month real world stress test, with the overriding one being our long-standing liquidity and funding model. This includes our robust and conservative capitalization, high quality and liquid inventories and secured funding that is readily and consistently available through clearing houses were fixed for appropriate periods of time.

Having provided the markets with unprecedented transparency with respect to our inventory and funding, we meaningfully reduced the size of our balance sheet in November to definitively prove our capability, capacity and willingness to do so. Specifically, our year-end total assets were $35 billion, reduced by over $10 billion or nearly one quarter from $45 billion at the end of the third quarter in August. Our resulting leverage ratio at quarter end was 9.9x shareholders' equity, reduced from 12.9x at August 31.

We improved the liquidity profile of our inventory with our Level 3 assets down to $428 million at year end, reduced by $139 million or 25% from $567 million in August. Put differently, our Level 1, Level 2 assets at year end were over 97% of our long inventory. We ended the quarter with cash of approximately $2.4 billion, unencumbered liquid collateral of $1.2 billion, $850 million of unused committed bank lines and $1 billion of unused uncommitted bank lines. I would like to reinforce that underneath it all, our balance sheet is supported by our total long-term capital base of $8.2 billion.

I will now turn it over to Peg to discuss our results and balance sheet in more detail.

Peregrine C. de M. Broadbent

Thank you, Rich. As Rich mentioned for the fourth quarter, Jefferies posted net revenues of $554 million, net income to common shareholders of $48 million and earnings per share of $0.21. Before I return to the results, let me describe the debt extinguishment gain that Rich mentioned earlier, which on a pretax basis was $20.2 million and recorded in our other revenue line.

Briefly stated, our broker-dealer makes markets in Jefferies' debt. Given the extreme volatility in our debt crisis in mid-to-late November, there was a significant amount of secondary trading volume through our market-making desk. In accordance with the accounting guidance in ASC 470, the significant price volatility and volumes of the market-making activities of our own debt gave rise to this gain, whereby in effect certain purchases of our debt are treated as extinguishments and sales are treated as reissuances. This $20.2 million will be amortized as additional interest expense over the next 6 to 7 years at a cost of approximately $1.50 per share per year.

Separate from this market-making activity, we repurchased below par and retired $50 million of our 7 3/4 March 2012 debt, which gave rise to a pretax gain of about $1 million, which is also included in the other revenue line. When the 2012 issue matures in March, we will purchase the remaining $255 million with cash on hand.

Now for our fourth quarter results. Equities net revenues for our fourth quarter were $124 million, roughly flat from the third quarter's $127 million. Fixed income net revenues were $141 million, up significantly from our third quarter 2011 results of $33 million, but down from the $228 million reported for last year's fourth quarter. Investment banking revenues were $261 million, down about 11% from the third quarter's $294 million and the $292 million reported in the fourth quarter of 2010. Of the $261 million, capital markets revenues were $89 million and advisory revenues were $172 million.

Asset management revenues for the quarter were $7 million compared to the $3 million reported in the third quarter and $5 million for the fourth quarter of last year. Our non-compensation expenses were $178 million, which included a full 3 months of base expenses versus 169 million for the third quarter, which included only 2 months of base expenses. Our compensation expense ratio for the fourth quarter was 55.6%. After adjusting for the Bache margin purchase accounting gain and the debt extinguishment accounting gain, our compensation expense ratio for the full fiscal year was 59.4%.

Our tax rate was 35.5% for the fourth quarter. Our adjusted tax rate for the full fiscal year 2011 was 36.2% after adjusting profit before taxes for the impact of both the Bache bargain purchase accounting gain and the debt extinguishment accounting gain. We repurchased 5.1 million shares of our equity during the quarter at an average price of $10.89, with current board approval to buy back an additional 14.9 million shares. In addition, as stated before, we repurchased and retired $50 million of our 7 3/4 March 2012 debt during the quarter and intend to use cash on hand to repay the balance of maturity. Book value per share was $16.35 at quarter end based on 197 million shares outstanding. Adjusted book value per share was $15.48 based on 221 million shares outstanding, including restricted stock units.

As Rich mentioned, we estimate that total assets were $35 billion or 9.9x shareholders' equity at November 30. This is down from the total assets reported at the end of August of $45 billion, which was 12.9x shareholders' equity. We estimate that our average balance sheet during the most recent quarter was about 43% higher than the quarter end amount. This number is higher than normal due to the significant reduction in our balance sheet in November. The majority of the decrease in our balance sheet included self-imposed reductions in our long and short inventory and the corresponding secured funding activities, as well as reductions in our match-to-book balances, thus again demonstrating the liquid nature of our trading assets. We undertook this reduction in the last few weeks of the quarter.

The decrease in our balance sheet also included reductions in client segregated cash and securities balances. At November 30, we estimate that client segregated balances were about $3.3 billion, a decrease of about $2 billion from the $5.3 billion reported at August 31. Of the approximately 350 prime brokerage clients we serve from our Jefferies broker-dealer and about 2,000 commodities clients from our Jefferies Bache FCM, about 8 prime brokerage and 40 Bache clients left the firm in November. In addition, 34 prime brokerage clients transferred their cash balances to an alternate custodian with which we had a master custodian agreement since the end of 2008, while Jefferies continues to serve them in all other respects.

The impact of these transfers plus the transfers out of excess cash by Bache clients is estimated to have reduced our balance sheet by $1.3 billion with no material impact to revenues. We are pleased to report that as the truth has defeated misinformation, several of these clients are already reinstating their accounts with us and we are privileged to be serving them again.

We are also pleased to report and particularly as it pertains to customers segregated funds at Jefferies Bache, in the first week of November at the high point of concern, the CFTC reviewed the customer segregation practices of Jefferies Bache and reported no issues.

As we reduced our balance sheet, we actually improved the mix of our trading assets compared to the end of the third quarter from both a price transparency and liquidity standpoint as measured by Level 3 assets and fundability respectively.

As Rich mentioned, we estimate our quarter end Level 3 assets after accounting for non-economic interests were approximately $428 million, down 25% from the $567 million reported at the end of the third quarter. Level 3 assets are now only 2.6% of our financial instruments at fair value compared to 3.1% at the end of the third quarter. We estimate that the portion of the year-end inventory that was fundable are haircuts of 10% or less, increased from 79% at the end of the third quarter to 85% at the end of the fourth quarter.

At November 30, our inventory included $375 million long and 534 short of debt issued by Ireland, Italy, Portugal and Spain and we hold no positions in the debt of Greece. To be crystal clear, these are cash long and cash short positions that are essentially matched by maturity and country and do not contain credit default swaps or exotic instruments of hedges. Our net exposure to these countries, including bond equivalents of listed futures we owned was net short $123 million.

As recently as yesterday, our gross and net exposure to these countries was at comparable levels. We continue to turn over our sovereign debt inventory 2x to 3x per week. Even outside our sovereign debt business, we are primarily a cash-driven firm. We have fewer than 100 credit default swap positions across our entire global platform, with total long and short market values of only $61 million and $30 million respectively. We do not make markets in over-the-counter derivatives and therefore, the limited number of fixed income OTC derivatives we have in our books are merely for hedging interest rates and certain credit risks.

The mix of secured short-term and long-term funding that supports our trading assets continues to reflect the quality and mix of our trading assets. Compared to others in our industry, our inventory is highly liquid, price transparent and includes only small numbers of over-the-counter derivative positions and therefore, does not exclusively require long-term capital to fund it. Relative to the size of our firm, we believe the risk here is immaterial.

At year end, we estimate that 87% of our repo activity used central clearing utility-eligible collateral. This is a further testament to the high quality of our inventory. The remaining 13% is termed out for an average in excess of 2 months. We estimate that our average VaR for the quarter decreased to approximately $9.5 million from $10.5 million reported in the third quarter. Our VaR at November 30 was $6.4 million. This reflects our significant reduction of balance sheet and risk. At November 30 we had a total of 3,898 employees, a net increase of 56 people since the end of the third quarter. Today, we have 3,851 employees, reflecting a modest recent reduction in headcount in our equities business.

Brian will now address in more detail our investment banking business.

Brian P. Friedman

As Peg indicated, investment banking net revenues were $261 million for our fourth quarter. Our capital markets revenues were $89 million, with debt capital markets generating $62 million and equity capital markets $27 million. Our backlog in both debt and equity capital markets remains solid and broad-based, but conversion realization of this backlog is, as always, subject to market conditions and other factors in the new calendar year.

During the fourth quarter, we completed 107 capital markets transactions comprised of 99 debt deals and 8 equity transactions. Notable deals we completed using our broad product platform included several where we provided both the financing as well as serving as M&A advisor. We acted as joint lead left arranger on a $355 million senior secured credit facility for National Healing Corporation and also joint financial advisor to Wound Care Holdings for their acquisition of National Healing. Also, we were sole lead arranger on a $175 million senior notes offering for Omega Specialty Steel and sole financial advisor to Optima Acquisitions, LLC's purchase of Niagara LaSalle Corporation. We were sole book runner on a $150 million senior notes offering for Acadia Healthcare and we're also sole financial advisor to PHC's $550 million merger with Acadia. We acted as sole book runner on Greenfield Energy Services' inaugural $250 million senior notes offering.

We were sole placement agent for Chesapeake Energy's $500 million private placement of perpetual preferred shares to EIG Global Energy Partners. Jefferies previously advised Chesapeake on 19 transactions with an aggregate value over $28 billion since January 2007. We also acted as lead placement agent for Plain -- Explains Exploration & Productions (sic) [Plains Exploration & Production] $450 million securities placement with EIG Global Energy Partners. We were joint left book runner to Senior Housing Property Trust $193 million follow-on equity offering.

As part of our leading position in underwriting Ginnie Mae multi-family securitizations, we acted as sole manager on a $444 million Ginnie Mae commercial mortgage and a $575 million Fannie Mae residential securitization. Also, in the public finance arena, we were lead manager to the Board of Education of Chicago's $398 million general obligation bond offering.

Our M&A and advisory revenues were $172 million for the fourth quarter. Notable M&A deals included our acting as sole financial advisor to Hilcorp Energy's sale of Eagle Ford-explorer Hilcorp Resource LP's assets to Marathon Oil Corporation for $3.5 billion. We acted as sole financial advisor to Exponent Private Equity's acquisition of BBC Magazines. Also, we acted as sole financial advisor to Alere's GBP 235 million acquisition of Axis-Shield plc and we also acted as sole financial advisor to first Edinburgh home's sale of Mint Hotel chain to Blackstone.

We acted as sole financial advisor to Omega Engineering's $475 million sale to Spectris plc and as sole financial advisor to Novem Car Interior Design for their sale of Novem Beteiligung to Bregal Capital LLP and sole financial advisor to Consol Energy's $594 million Utica shale joint venture with Hess Corporation.

As mentioned earlier, we entered our new fiscal year with a solid backlog, including the recently announced acquisition of Samson Investment Company by KKR Natural Gas Partners, Crestview Partners and Itochu Corporation. This transaction represents the largest ever leverage buyout of an exploration and production company, the largest U.S. LBO of 2011 across any industry and the third largest U.S. E&P M&A transaction since 2008.

For the full year, our investment banking revenues exceeded $1.1 billion, up 16% from annualized 2010. We have expanded and deepened our capabilities across sectors, products and geography. We believe we distinguish ourselves by our clients' first focus, as well as our distinct ability to nimbly integrate and deliver our firm-wide strengths in capital markets and financial advice. While we will gradually continue to expand further our team around the world, we now have a significant global footprint to continue to build market share and further enhance our brand.

Rich will now review our trading results.

Richard B. Handler

Thanks, Brian. Our fixed income revenues were $141 million for the quarter versus $33 million in the incredibly challenging period during the third quarter. While the fixed income market improved from the panic that was prevalent in August, our results reflect a period of reduced customer activity in September, a pickup in volumes in October and the material impact of Jefferies being the focus of unwarranted attention in November.

Our equities revenues were $124 million for the quarter compared to the $155 million reported in the fourth quarter of last year our equity revenues are sensitive to trading volumes, which were very lackluster during the quarter. Our overall trading results in 2011 were held back by 3 significant factors: first, investors' reluctance to take risk and transact in the face of abject political and economic uncertainty; second, a sharp downward move in the credit markets; and third, the meaningful reduction of our client flows in November due to the attention focused on Jefferies. Despite these challenges, we had solid performance. Over the past 5 months, we began to integrate and expand our marketing of the Jefferies Bache futures commodities and foreign exchange capabilities and expect to enhance our position in these businesses over the next several years.

Fiscal 2012 was a new year and with competitive and legislative forces continuing to evolve in ways that favor our client-focused model, we are optimistic that we continue to take market share and participate fully in serving our clients' need in the capital markets. Having heard all this, we hope you now understand why in the face of what in most years would be viewed as a rather mediocre quarter, we can say we are proud and pleased with our year-end results.

Our firm stood up in every way possible against a direct challenge in a particularly perilous market environment. The range of our results over the past year demonstrates the durability and the upside of our platform. Our year-end balance sheet is the ultimate confirmation of our management of capital and liquidity and most importantly, the quality and depth of our human capital that supports Jefferies.

The month of November and our quarterly results are indeed a testament to the hard work, tenacity, honesty, transparency, humility and passion of all of our 3,851 employee partners, without whom none of this would have been possible. Additionally, we had a lot of help from the outside during the entire month of November. Our long-term shareholders stepped up and stood shoulder to shoulder with us. Most of our bond investors took the time to do their work and remained committed to the long-term value we believe Jefferies' bonds offer. New equity, debt and convertible bond investors across the Board stepped in to capitalize upon the opportunity the market dislocation afforded them. We could not have asked any more of our trading and banking clients who showed us how much they value their long-term relationship to our firm and behind it all, our Board of Directors supported and guided Jefferies throughout. We are humbly grateful to all. We'll now open the phone for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Chris Kotowski with Oppenheimer Funds.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

I wonder if you can talk about whether this current, the $35 billion level assets, is that something you anticipate maintaining for any amount of time. Or has that normalized more towards the level of prior quarters?

Richard B. Handler

Chris, first off, we made a decision in November first and foremost that it is our job to prove to the world and the marketplace that our balance sheet is flexible and it's liquid and we acted pretty aggressively with our sovereign exposure and we felt it was important to show the world that we can come in on a balance sheet that's under 10x for the quarter. We also recognize the world has changed and people's fear of leverage and regardless of how clean a balance sheet one can see they have in this current climate, people are very nervous. I believe everyone's balance sheet is under pressure to come down. We also recognize that we are in the business to make money and November and the last 6 weeks or the last 4.5 weeks of November were basically to prove to the world we have a solid platform. We're going to operate going forward to make money. I think that means a lower balance sheet in general. We're cognizant of the externalities that we're in, but I think that you should assume that we'll rise periodically given the opportunities and we operate at a relatively reduced balance sheet until we see some light in the world.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Okay. And then with a full quarter of the Bache acquisition under your belt, is that tracking roughly as you anticipated? And can you maybe discuss a little bit about what was entailed in the CFTC review of the customer segregation and what the findings were?

Richard B. Handler

I think the thing to say on Bache is it's exactly as advertised when we made the acquisition; solid people, great client relationships, good operating platform and one that we see a lot of opportunity to basically build upon in the foreseeable future and nothing we've seen thus far makes us think anything other than the fact we have been making some hires in that area in terms of the buildup. In terms of the CFTC, as you would expect, when MF occurred and we were in the neighborhood, they very quickly came in for a 2-day standard review of all of our accounts in our segregations and basically were pleased.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Okay. And then finally, you mentioned the headcount reduction late, I guess after the quarter and is the severance for that in the fourth quarter? Or is that to be expected in the first quarter?

Brian P. Friedman

The severance for that will be in 2012 because the reduction took place in December but I mean, frankly, it's immaterial and we recognize that in our 2011 comp, there also were headcount reductions from time to time. So frankly, that's at this point, ordinary course and it's included in the comp count. No reason to treat that in any way extraordinarily.

Operator

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

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

I was wondering if you could spend some time talking through the fixed income line. And I guess notably, would love to get a little bit more focused on the net loss and the noncontrolling interest. I'm guessing that's tied to the high-yield part of the business, but would love some color on that. Where did you see the most pressure in fixed income? Was it in rates? Was it in principal trades which looked lower versus agency or just any more color? That would be great.

Peregrine C. de M. Broadbent

Well first of all, just to address your point on the minority interest, the minority interest line items in our income statement, which are referenced as interest on mandatorily redeemable preferred interest on consolidated subsidiaries, all the earnings to control -- noncontrolling interests, both of those reflect predominantly the minority share of the profits, net profits from our high-yield joint venture. So to the extent that, that high-yield joint venture made a loss for the quarter, then the minorities share and the risk and rewards of that activity and that's what's reflected in those lines.

Brian P. Friedman

As far as the business mix, I think there's 2 things we would say. One is that rates was the stronger part of the business. Credit was better than the abject results of the third quarter, but still not back to where we'd like to see them. As a corollary to that, I would say to you that October was the most "normal month". September was a very slow recovery from tough conditions in August and November was a distracted month because of all that was going on. So it's a funny quarter for us to the extent you want to extrapolate to the world. All we can say is that September was slow coming out of August. October was closer to a momentum kind of month and we'll never know what November could have been, but it wasn't what it could have been.

Richard B. Handler

I would also add that the tone in December is more along the lines of October in terms of people back to business and the flows are reasonable and bid-ask spreads are -- is capable of making money again.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. Brian, while you're on the line about advisory, would love to get a little bit more color here to a very good number here to end the year and much better than we would have seen from some of the publicly available data, and not for the first time it seems like it's been a consistent trend for you guys. So what are you seeing in the business that is just sort of driving more and more of that upside? And is that -- you mentioned the backlog being fairly decent heading into the fiscal '12 numbers, but how do you see that business progressing from here, given what your conversations with CEOs are like?

Brian P. Friedman

Well, I'll start with the micro and go back to the macro. I want to be careful how I say this, but I think it's just fair to say we have a really good investment bank. The quality and the breadth of our team in terms of the sectors we cover, the depths we have in those sectors, the positions we have in those sectors and the breadth of our product capability. I mean it's incredibly valuable to be a full-service firm to be able to transact and have knowledge of the capital markets, have the sector knowledge and have the ear of the top management, so that we're a big player in M&A restructuring and strategic. So being who we are, I think, is a big part of it. If you look at it in terms of our development, we've been strengthening our investment bank forever. We continue to do that earnestly in the last, I'd say, 2.5 years from about the summer of '09 until now. We've been in a pretty steady buildup of ever-greater talent and that's just paying off. I just -- I really think it's simply that we are breaking through to be one of the principal financiers and advisers to companies around the world. Obviously, we are still the largest, are the largest business in the U.S.. We're starting to break through, as you can hear, some of the PLCs. We're starting to break through in Europe and some of the German names and we're early days by getting a little bit of traction in Asia. The macro is -- and again, you're probably getting a little bit of our personal view versus necessarily -- it's hard to tell the currents. People are focusing on things like AT&T having to back off the T-Mobile and say, "Oh my god, regulatory's getting in the way." I mean I would say the much broader thrust is that we are probably in a longer-term slow growth environment and so those companies that want to really grow and build their positions are going to have to do it with strategic activity. So M&A is going to continue apace whether it be because of corporates looking to grow or on the other side, private equity having ample cash reserves and looking to put it to work in smart ways. Personal view from us is that M&A activity is going to continue a pace, and the only thing that would get in the way is if there was really no financing. But again, if you look at balance sheets, corporate balance sheets are in good shape and therefore, we think it's going to continue. Our momentum into the first quarter is strong. December is a very solid month. Now Decembers are often good because you have transactions that are timed to year end, but this December is not disappointing. So we're starting off of the new year and the new quarter in reasonable shape on the banking side.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Okay, great. And then just last question for me and maybe just the principal transaction, I want to come back to a question I asked earlier, $37 million, obviously, the third quarter is very challenging, but is this a decent run rate? Or is this just sort of the fallout from November and you do a lot more agency business versus principal? How should we think about that particular line on the income statement versus the rest?

Richard B. Handler

I don't think you can really extrapolate anything from this quarter based on that line item. It was a crazy period for us in November and it's just -- I don't think you really can extrapolate.

Operator

Your next question comes from the line of Patrick Davitt with Bank of America.

M. Patrick Davitt - BofA Merrill Lynch, Research Division

In the vein of Dan's question on M&A, I'm curious, do you guys know what about your advisory business that creates such a big disconnect between what we can see in the publicly announced stuff? Because it does appear to be a lot more disconnected than we see with other firms in terms of trying to forecast that line item.

Brian P. Friedman

I think if there's any disconnect and it's not a disconnect. I think if you want to really fine-analyze our investment banking of -- and this is part design, part maybe good fortune, we are strongly represented in sectors like energy, healthcare, consumer, industrial...

Richard B. Handler

Technology.

Brian P. Friedman

And TMT. Financials is at the moment one of our smaller commitments, not because of lack of desire or interest. We just haven't yet built it up to the scale we want. So the mix of our team and the mix of our commitments probably favors the current flavors in terms of where drive is. The drive in M&A is probably more consistent generally in places like healthcare and TMT just over the cycle. Energy happens to be in a very strong place and we happen to have an exceptional team. So things are coinciding in terms of where we happen to have our commitments and where the market is favoring the sector, so I think it's a little bit of favorable selection again. A little bit of design, a little bit of luck.

M. Patrick Davitt - BofA Merrill Lynch, Research Division

Okay. Would you say there a lot of mandates that you get paid a good amount on that are not publicly announced? Could that be a part of...

Brian P. Friedman

Absolutely. I mean because of confidentiality provisions, because of private transactions versus public, whatever the reason, the databases that you and we look at to try to get industry metrics, they're directionally good, but they aren't perfect.

M. Patrick Davitt - BofA Merrill Lynch, Research Division

Right, obviously, okay. And post-AMF, there was some talk about the fed reviewing their nonbank holding company primarily dealers and I believe you're the largest nonbank holding company primary dealer. In terms of possibility having some higher capital restrictions or more regulation, could you speak to that and if you've -- how those conversations have gone or if you're concerned about that?

Brian P. Friedman

Other than the speculation that we also observed, there's been no particular conversations or anything in that direction. We obviously have substantial capital base. We think we do a great job as a primary dealer and there's been nothing of the sort.

Operator

Your next question comes from the line of Joel Jeffrey with KBW.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Can you just talk a little bit about the comp ratio in the quarter? Is this kind of a true up for the end of the period? Or is there -- would you expect to sort of run at these levels or slightly higher going forward?

Peregrine C. de M. Broadbent

The comp rate for the quarter when you normalize for the accounting gains of the third and the fourth quarter were pretty similar to one another. So the comp rate on a normalized basis was a little under 60% and for the 9 months through August, it was around 60% as well. The comp rate's been distorted by the accounting gains that we discussed in the prepared remarks, and that's why we set out the information, Joel, on the last page of the supplement of our financial information that sort of sets out the numbers with and without the accounting gains including the comp rate. So there wasn't any specific true up on that basis.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then in terms of thinking about the size of the balance sheet, the average number is significantly above where the period end was and could you give a little more color on that? Was that just primarily due to what happened in November and -- or was there anything else going on there?

Richard B. Handler

No, it was entirely November. We were on the way to having a reasonable quarter with operating everyday business and November occurred. So as a result, we wound up being proactive and dramatically reducing some of our exposures in inventory and reducing our balance sheet, and that's why the average is so much different than the closing balance.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then just sort of sticking with FIC, I mean in the past, you guys have certainly posted stronger revenue numbers coming out of that line with a smaller balance sheet that's been even smaller than you're currently running. Is there a particular business line within FIC that you can point to that you think you can operate in, in these lower balances and generate sort of historical revenue levels?

Richard B. Handler

I'll tell you, the world, if you go back to periods where the world was unsettled and people were reducing leverage and balance sheet, that really played into our strength. And as a client-focused firm with the breadth of our sales force and the talent of our traders, we do well in those environments and quite frankly when the world is leading with capital, those are periods of time that we don't do well. So we think across the board, we have the capacity to make money in our fixed income business operating with a reduced balance sheet.

Operator

Your next question comes from the line of Mike Holton with the Boston Company.

Michael Holton

Two quick questions. The first one is given the movement in your debt spreads during the quarter, can you talk about what type of gain you got from DBA?

Richard B. Handler

We don't take any gain from DBA, right?

Peregrine C. de M. Broadbent

We do not mark our debt to market. We do not. There was no gain that was taken from that.

Michael Holton

Okay. And then the second one is just given what you just said and in terms of the environments when you do better, so we should assume in an environment where customer flow is normal or accelerating, you do better. But in an environment where people are kind of sitting on their hands you, like a number of others, would do less well? That's a way to kind of think about the model?

Richard B. Handler

That's exactly right. In periods where our clients are frozen, hanging on each headline in Europe, there's not a lot of activity to trade and in periods -- we don't need a great market. We just need people to be calm and trying to invest and we can facilitate trades and provide liquidity and make money.

Operator

Your next question comes from the line of Peter Kuechle with Frontier Capital.

Peter G. Kuechle - Frontier Capital Management Co., LLC

Rich, a question for you on the compensation and 2 things. One is can you go through -- for senior management, it's been a challenging year for shareholders of Jefferies' stock, can you just go through how the senior management -- what the key metrics are for compensation and any details you can give on senior management bonuses for this year? And then a little bit more on the rationale of the claw back structure for the employee compensation and your thought process on that?

Richard B. Handler

Sure, Peter. Look, this is a tough year for everyone on Wall Street. There's no question about it and one of the things that we try to put in place as we're trying to manage all of our constituencies is to basically make sure that we protect our scarce dollars. So we're trying to figure out away on the claw back to really not harm our employees, but create a mechanism where if someone was going to leave, effectively the firm who they went to go to would pay for them to leave. So in effect, if you're a happy, committed Jefferies employee, it will cost you nothing if you're going to leave, the way Wall Street works, you could probably still leave and the other firm will pay us back and it was important for us to make sure we expense it all in this year so there's no accounting gain. And while we asked everybody to make that sacrifice in regards to the first part of your question for both Brian and myself and a number of other senior leaders, we -- we've given back our entire bonus, requested the Board to do it and the Board accepted it and we're all in it together with people so we're asking some compromise from our people. We recommend -- we recognize our shareholders had a tough year. We're shareholders and we're getting 0 bonus.

Operator

Your final question comes from the line of Jeff Harte with Sandler O'Neill.

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

One thing just from a clarification standpoint, you had mentioned headcount was down modestly since the end of the fiscal year. It was like a 1% or something close to that, yet there's been a lot of press speculation about much bigger headcount reductions going on. I mean are -- is there more headcount reductions to come near term? Are you planning...

Brian P. Friedman

We're in a world of speculation. We'll give you the simple facts. We did have a headcount reduction in our equity business that numbered slightly over 70 people. Unfortunate, we don't like to have to make changes like that. But given the relatively quiet activity in equities and all the changes and frankly the investments that we had made across the board, we felt we needed to tighten our costs, so we made a headcount reduction that was numbered in the 70s of people. That represented less than 2% of our firm. I think what may have happened is that it represented about 10% of our global equity for us and somehow, people mistakenly may have attributed that to the entire firm. So it was about a less than 2% or about 2% reduction in our overall firm. We are constantly reviewing our staffing levels. We are constantly making sure that we have the productivity that we need, so that's why that happened. We have no particular plans for any meaningful other changes. We're going to constantly watch it. I think one thing we are saying, I think, and we said this in the investment banking discussion before that any further increases in headcount around our firm are going to be extremely gradual. We've really filled out the architecture of our firm almost across the board. We've caught up in all of the needs we have. We obviously made the Bache acquisition in the last year. We feel we've reinforced our support functions. So we think we have the headcount to deliver clearly the results we're delivering and much more.

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

Okay, and on -- can you talk a little bit about the non-comp outlook? I mean the $177 million number for the quarter was bigger than I was expecting. How should we be thinking about 2012?

Peregrine C. de M. Broadbent

I've considered it that going into 2012, we'd expect our non-comp expenses to be in the low-170s. The fourth quarter non-comp expenses included some unusual marketing expense items and on that basis was somewhat of an aberration. So that's how to consider the non-comps going forward.

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

Okay and finally, we've said that this has been hit a few times. When we look at the balance sheet being down 20-some percent sequentially and at least the last couple of quarters when we kind of do the asset turn calculation, the return on assets on a revenue basis was quite a bit below historically where it's been. How much of that do you look at as just being a tough environment versus maybe some secular changes? And how does that kind of impact your thinking for your revenue generation capacity going forward?

Brian P. Friedman

The second half of the year was -- August on the credit side took a lot out of the revenue base. September didn't deliver revenue and November revenue, in our view, was missing that would have, could have, should have might have been there, but we didn't have unfortunately the kind of operating environment we would've liked because of the distraction of what was swirling around. So in fairness, you've got to take the second half of the year and again, it's all speculation, but something should be added back for normalcy and just regular operation even in a choppy world. It was choppier than even a normal chop. When you take that into account, you get to somewhere between the second half and the first half of the year is probably being what this last period might have could have been probably a better guide for what the current moment is. What next year holds, it's still very early. When you get to our assets, I mean recognize that and you can see this and you'll see it when we publish our 10-K, but you'd see it in each of our quarterly reports when you get the detail on the makeup of our inventory. As you know, there's relatively large amounts that you carry for inventory in your rates business and your mortgage business at very low cost, and it turns very rapidly and you earn comparatively small amounts on it, but you get profitability from it. So ROE is a better measure of our activity and return on capital is a better measure than return on assets just because the mix of assets is a disparate mix and again, the preponderance of it is highly liquid. It will be better, we believe, in the long term; much better than the second half, better overall than 2011. We think 2011 was quoted down year. One thing I would point out, everyone's wanting to look at the down of 2011. With everything that was thrown at us in the third and fourth quarters, we maintain reasonable profitability. We did that with as the question before, without marking to market our debt. We did it through the business by operating smartly, by controlling our costs. We think now, we have opportunity to both leverage our people, leverage our operating balance sheet and keep our cost tight.

Richard B. Handler

And keep in mind, for the first half of the year, it was not a robust marketing -- market environment. It was an okay market environment. And before our Pru Bache acquisition, before our raising of additional capital, before a bunch of our bankers who we had hired came onto the platform, we're on a run rate for a $3 billion revenue year with potentially a $400 million type earnings number. So we're not saying we'll go back to a stable environment overnight, but there's a lot of operating leverage in this company. And in a reduced balance sheet world, we're very capable, our business model is intact. We've been operating that for -- in that world more than anybody and we feel like we're pretty well positioned for the future.

Operator

That concludes our question-and-answer session for today. I would like -- now like to hand the program back over to management for any further comments or closing remarks.

Richard B. Handler

Thank you, everybody, for listening to our call. We wish you a happy and healthy new year.

Operator

This concludes today's conference call. 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's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts