Jefferies Q3 2007 Earnings Call Transcript

Oct.16.07 | About: Leucadia National (LUK)

Jefferies Group Inc. (JEF) Q3 2007 Earnings Call October 16, 2007 9:00 AM ET

Executives

Richard Handler - Chairman and CEO

Joe Schenk - CFO

Brian Friedman - Executive Committee Chairman

Analysts

Douglas Sipkin

David Trone

William Tanona

Joseph Dickerson

Arbi Gosh

Ryan O'Connell

Corey Gelormini

Erin Caddell

Operator

Welcome to the Jefferies 2007 Third Quarter and year-to-dateFinancial Results Conference Call. A question-and-answer period will followmanagement's prepared remarks. (Operator Instructions). As a reminder, thisconference call is being recorded.

A press release containing Jefferies 2007 third quarteryear-to-date financial results was distributed via Business Wire before themarket opened today. It can be accessed at Jefferies website www.jefferies.com.

Some of the comments made in this conference call mayinclude forward-looking statements. These forward-looking statements maycontain expectations regarding revenues, earnings, operations and any otherfinancial projections and may include statements of future performance, plansand objectives. These forward-looking statements usually include the wordscontinue, will, believe, should or other similar expressions.

Actual results could differ materially from those projectedin these forward forward-looking statements. Please refer to the JefferiesAnnual Report on Form 10-K, filed with the Securities and Exchange Commissionon March 1st, 2007 for discussion of important factors that could cause actualresults to differ materially from those projected in these forward-lookingstatements.

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

Richard Handler

Good morning and thanks for joining our discussion ofJefferies' 2007 third quarter and nine months results. With me on the calltoday are Brian Friedman, our Executive Committee Chairman and Joe Schenk, ourChief Financial Officer. As always, each of us will be happy to answer yourquestions after our prepared remarks.

Before discussing the financial and business highlights forthe quarter, I would like to take a moment to highlight our announcement lastweek of the appointment of Mr. Peg Broadbent as our next CFO. Peg joins us fromMorgan Stanley, where he has worked for 16 years, most recently worked as acontroller of the institutional securities and investment banking business.Peg's background experiences are perfect for where Jefferies is today and how wesee our business growing and developing.

As most of you know by now, Joe Schenk, our CFO for the pasteight years has decided for family reasons to move back to Chicago. Joe has played an important role inthe build-out of Jefferies this decade. We all owe him a great debt ofgratitude for his time, commitment and attachment for our firm. As we begintransition of CFO role at Jefferies to Peg from Joe, we all wish Joe and hisfamily the best of luck in the return to the Midwestand offer him our sincerest thanks.

I expect most of you have had a chance to review thismorning's press release. Needless to say, this was the toughest quarter, ourindustry and the markets have experienced in a long time. Although Jefferiesdid not have any direct exposure to subprime mortgages or any meaningfulexposure to fringe loans or unfunded debt commitments, our businesses werecertainly impacted by the general market downdraft and the extreme volatilityacross most of the markets.

The fact that our net earnings during the quarter were amere $7 million below last year's comparable period, it confirms our beliefthat the breadth and depth of our platform will always perform across thecycle. While we must prefer to be announcing continued all-time record numbers,we view these third quarter results as solid core from relative to theenvironment as we weather the storm and remain in a very strong position tocontinue our growth in global expansion.

Our third quarter earnings per share were $0.26 versus lastyear's record third quarter of $0.32. Net revenues were $334 million versuslast year's $341 million. Net income was $39 million versus $46 million.

Although it was an outright brutal environment for most ofthe thirteen weeks in the quarter, we are proud that we protected our platform,managed our overall risks and worked extremely hard for the benefit of ourclients and our shareholders.

We did not have any one-time write-downs to announce as allfrom mark-to-market are included in our normal operating results. This is alsoworth noting, like many of our competitors, we have not recorded any gains andwe expected decreases in value of our outstanding liabilities.

For the first nine month, Jefferies posted a record netearnings of $160 million, record earnings per share of $1.12, record netrevenues of $1.2 billion and record investment banking revenues of $583million.

We are pleased to note that this year-to-date investmentbanking number already exceed banking revenues for all of 2006.

Now I could turn over to Joe to review some of the financialhighlights.

Joe Schenk

Thanks Rich. We've covered our overall results, and now wewill talk to our individual revenue lines. Equities had a solid performanceduring the quarter, with revenues of a $140 million versus a $113 million inlast year's third quarter. These incoming commodities, excluding high yield,were $17 million versus $51 million. High yield revenues were negative $7million versus positive $11 million and asset management revenues were negative$6 million versus positive $17 million last year.

Our record third quarter investment banking revenues are$119 million compared to $145 million for the same period last year.

As you would expect there are a number of things thatimpacted these results that Brian and Rich will discuss shortly.

For the nine month period, equity revenues totaled $458million, fixed income and commodity revenues totaled $103 million, high yieldrevenues totaled $37 million, investment banking, $583 million and assetmanagement, $30 million.

Comp and benefits, as a percentage of net revenues, were54.9% for the quarter versus last year's 54.1%. For the first nine months, thisrate was 54.4% versus 54.8% last year.

Non-comp expenses, excluding interest expense, were $95.6million for the quarter versus $80 million for the same quarter last year.

Non-comp expenses have been driven primarily by higheroccupancy and technology costs, as well as legal and compliant costs associatedwith the growing firm.

As we have mentioned before, we are in the process of ameaningful build-out in both New York and London, which will beconcluded early next year.

Our average headcount was 2,472 employees for the period, up12% versus the same period a year ago.

Our effective tax rate for the quarter was 39.1% versus thesame as the third quarter last year.

Our pre-tax operating margin for the quarter was 16.5%versus 22.4% last year.

Stockholders' equity at the end of the third quarter wasapproximately $1.8 billion or $14.58 per share.

During the quarter, we repurchased approximately 1.1 millionshares at an average price of $26.17, $1 million of which were purchased in theopen market, our first meaningful open market purchase in several years.

Now, I would like to turn it over to Brian Friedman to talkabout investment banking and asset management.

Brian Friedman

Thanks, Joe. As Joe mentioned, the Jefferies investment bankwith $190 million in revenues for the quarter recorded a second best quarterever. We are particularly proud of this accomplishment as the summer is often aslower banking period and this was further complicated by more challengingenvironment in which to close deals. In fact we achieved these results despitea number of our banking transactions being postponed due to market conditions.

We believe our ability to generate our second best bankingquarter ever, is a result of our diversified, full service and increasinglyglobal platform, the loyalty of our client base and the capabilities and focusof our employee partners.

Our total banking revenues for the first nine months were arecord $583 million, and as in recent quarters, we had great contributions fromJefferies Randall & Dewey in energy, Jefferies Broadview in technology andsome of our newest partners, Jefferies LongAcre in media. As well thesignificant deals in the aerospace and defense and maritime sectors.

Thorough the quarter, capital markets transactionrepresented approximately 49% of our investment banking revenues. Equity andequity-linked represented 26% of total banking revenues and fixed income was23% of the total. Approximately 51% of our revenues were M&A or advisoryrelated. We worked on over a 140 M&A or advisory transactions, totalingnearly $46 billion in value and will lead or co-lead on 14 equity, 6 convertand 17 leverage financed transactions, collectively totaling more than $4billion in value.

There are a number of third quarter transactions thatclearly demonstrate Jefferies ability to serve dynamic companies and theirinvestors, some of which we'd like to highlight. Specifically, we provided fullservice solutions to a number of clients during the quarter. Two examples ofwhich are our role in providing both M&A advice and acquisition capital inrespect of the sale of Scitor to the Leonard Green buyout firm. And ouradvising MIPS in this acquisition of Chipidea Microelectronica and providingMIPS a related bridge facility.

In addition, during this extremely challenging time for thedebt markets, Jefferies was sole manger on senior note offerings for a longtime clients Leucadia and Vector, 500 million and 160 million respectively. Aswell as $105 million of floating rate notes for MasterCraft. In one of the onlyhigh yield deal to get down in late July, we were joint book runner on $150million of senior notes for parallel petroleum.

In the equity capital markets, Jefferies participated inmany third quarter transactions, including jointly running the books for a $297million follow-on offering for Genco. One of our many co-manager roles includedthe $212 million IPO for WuXi PharmaTech, our second china-based healthcaretransaction this year.

Also in equity, we sole managed the $130 million block tradefor Eagle Bulk Shipping, which facilitated a $1.1 billion acquisition of AnemiMaritime, which our firm also represented as M&A advisor.

In other advisory work, Jefferies again represented Vertrue,this time in their $830 million sales to one equity partners, bulk investmentpartners and real ventures. Our private equity fund placement group, JefferiesHelix was also active, managing a $1 billion fundraising for European privateequity fund, focused on mid-market companies in the U.K.

Finally, in a transaction that demonstrates the leverage ofcombining our industry expertise with Jefferies strong restructuring group,Jefferies advised TriNet resources in its $104 billion Canadian dollar debt andpreferred equity restructuring and then arranging its $120 million creditfacility.

As we head into the fourth quarter, our partner, backlogremains robust, both in terms of products and industries. As always, strongcorporate capital markets and a healthy economic environment, our major driversfor us and the industry, as they effect our ability to successfully close onour backlog.

Turning to Jefferies Finance, our joint venture with MassMutual.Jefferies Finance was impacted only slightly by the harsh liquidity crunchduring the third quarter, completing 10 transactions, seven of which lead-managed. The portfolio of mostly senior secured loans held out very well,enabling this business to remain profitable during the quarter. The quality ofopportunities we are seeing is better than ever, and pricing has becomesignificantly more attractive, as we continue to grow our assets undermanagement at Jefferies Finance.

Asset management had negative revenues of $6 million, versusa positive $17 million in last years third quarter. Total assets undermanagement for the firm are approximately $4.9 billion. As most of you areaware, we do have a series of CLO funds that we manage as part of our assetmanagement business and we have equity investments in these CLO's. Although wehave no direct exposure to sub-prime mortgages, we did record write downs tothese CLO investments to reflect current market values. While these assetmanagement results on a relative basis are consistent with the environment, onan absolute basis we are not satisfied and we do expect to do better. We areconfident in our team and our investment strategies and believe we are on ourway to creating a solid long-term business for Jefferies.

As Joe mentioned earlier, in this fourth quarter, we areconsolidating our five offices in Londoninto one new trading, banking and asset management headquarters.

As we announced last week, David Weaver will becomePresident of our international operations at year end. David joined us earlierthis year after a long and successful career with Deutsche Bank and itspredecessors. We believe David brings the experience and breadth to lead ourefforts in Europe, as we seek to accelerateour growth there. David will replace Cliff Siegel, who plans to retire fromJefferies at year end, after 17 years with our firm. We thank Cliff for hisenormous effort and contribution, and we wish him and his family much continuedsuccess.

Now, I would like to turn it back to Rich.

Richard Handler

Thanks, Brian. First, I would like to make a few comments onour equity, fixed income and commodity, and high yield and distressed tradingbusinesses and their performance for the quarter. In terms of equity sales andtrading, we had a solid quarter with a $140 million in revenues. We continuedto invest heavily in additional equity-related products and services, includingequity derivatives, prime brokerage, special situations, and our new consumertrading among others.

Fixed income and commodity revenues at $9 million werenegatively impacted by a number of factors. Our investment grade fixed incomegroup was leveraged to the credit market meltdown and to the number ofassociated write-downs, which reduced their results.

Our commodity trading will be difficult trading conditionsin very volatile commodity markets we introduced results for the quarter. Thesebusinesses are well positioned for the fourth quarter and have performed wellso far this month to remain important components of our trading platform.

Our high yield and distressed trading group also had a verychallenging quarter. Trading was meaningful, highly effective but a virtualstance though in secondary activity into the credit crunch, as well as thereductions value of the equity and debt of leverage companies.

Our positions were all marked to proper evaluations thatreflected for our environment. Fortunately, we had been concerned about theopportunity environment and leverage finance for a while, so we only throughdown a position of the available capital of our high yield trading vehicle andwe employed no leverage at all during the quarter. While we are not pleasedwith losing money, be it only $7 million, we are clearly in a good position totake advantage of current and future opportunities, which are alreadypresenting themselves.

On the positive side, our high yield group will be able tocomplete a number of new issues, helping to generate $43 million in high yieldcapital markets revenues, which are included in our investment banking results,already reviewed by Brian.

As a result of this activity, Jefferies strike number oneduring the quarter for high yield transaction under $1 billion, both in termsof the value and the number of deals, which again speaks of the relationships,structuring ability and tenacity of our team.

Finally, I'd like to restate the obvious. We are very happythat the third quarter is behind us. It was extremely painful, the volatility wasoff the chart and the final results did not reflect how hard we overworked. Thegood news is that we protected our platform, performed for our clients, andremained extremely well positioned for the future. We are clearly experiencinga return to what we hope is normalcy, a list of businesses of Jefferies, andstarting with the last two weeks of September, we have regained much of themomentum Jefferies experienced in the first half of this year.

As we have seen over the last seven years -- as we have overthe last seven years throughout this quarter, we continue to invest in our firmand remain committed to our long-term and strategic goals. We are continuing tointegrate many of the great people of businesses that have joined our platformand we continue to review strategic opportunities and look for great partnersin all of our businesses. We have a conservative balance sheet, as a variablecost structure, if possible, high employee ownership, and a diverse andcomplementary slate of products and services. While we prefer our markets toremain stable, as it appears today, our promissory stakeholders is to do theabsolute price every single day because of certain environment.

And we will be happy to take questions.

Question-and-AnswerSession

Operator

(Operator Instructions). Your first question comes fromDouglas Sipkin.

Richard Handler

Hey Doug

Douglas Sipkin

How are you? Two questions. First off, one as it relates tosort of may be compensation, I know you guys continued to be aggressively hiringin the investment banking side arena. I guess compared to historical norms,would you say you have maybe a little bit less comp flexibility going forwardif market conditions were to sort of back up and we revert back to what we sortof saw in the last three prior months rather than what we are seeing inSeptember?

Richard Handler

We are thinking of the answer here. I think off the cut, Ithink we still have a pretty strong variable component to our compensation. Ithink we have enough flexibility to whether down trust in the marketplace. It'sobviously a lot easier in the market rebound, but we have a pretty committedand group of employees and the people coming in are owning stock over a periodof time and they are the long-term partners. So I don't think this to be a hugeissue.

Douglas Sipkin

Okay. And then secondly, I know it's been -- maybe close tothree years with the asset management business, any thoughts to may berejiggering the strategy a little bit or may be considering an acquisition ormay be considering the introduction of long-only more traditional typeproducts, or I guess you guys just going to continue moving forward with moreof your, I guess, your blended alternative and convertible strategy push?

Brian Friedman

I think we're committed to continuing the strategy thatwe're on. I would point out that a majority of the funds that we have operatingtoday began their lives '06 and '07. So it doesn’t go back as far as you'relooking. The alternative strategy, the first one goes back as far as late '02,but the bulk of the funds were seeded and started in '06 and '07. So I thinkthe answer is that it's still early and you're get both some start up and someearlier volatility as the managers emerge. On the point of our acquisitions, Ithink that we are always looking for clever ways to accelerate our growth. It'sclearly been beneficial for us in the banking area and it's been beneficial forus across the platform to see individual and associated groups of individualsjoins us here. So yeah, ourintent are always up and we are expanding our thinking.

Douglas Sipkin

Great. And then just one follow-up as a related equitytrading. It seems like you guys continue to do a fairly good job managing thatbusiness. Any color on competitive pressures, I know bids which is that blocksystem that all the large investment banks are been putting together had sometraction, is that something you guys are seeing on the competitive fronttrading, blocks or you still feel like there's a lot of room for you guys?

Joe Schenk

I think we've had competitive pressure in that businesscontinually for the last 17 years, but it just had value high before that,before I got here, it’s obviously a business that has new technology, newcompetitors and we are constantly seeing pressure on that business by the samefolk and we think we have a pretty unique niche its been more resilient thansome of your competitors and we are constantly investing and improving tomaintain that position. So it’s challenging, but we are pretty confident wehave a good strategic position.

Douglas Sipkin

Okay, great. And then Rich, I always just like to hear yourcolor on the high yield market, obviously going through one of the mostchallenging periods in a meaningful amount of years, I mean your perspective Iknow September is gotten a little bit better, the calendar has come back alittle bit, what's your view point for next three to five months out?

Richard Handler

Again, this is only for one persons perspective, we wereobviously not heavily invested in this period as we've been saying while, wethought that market was just incredibly sloppy. What worries me is that we’vebounced back so quickly that I just feel like there are still some systemicissues that have to work through the system. So, the world is not coming to anend like it was in August and in September and there is still transaction thatwill get done, but there is still lot of overhang out there and it’s the choppyenvironment. So I’m not particularly bullish, but the same token is that chanceto actually put some money towards the first time for a while and have usefulreturns, so on the left hand side there are some opportunities.

Douglas Sipkin

Great, thanks a lot.

Richard Handler

Sure.

Operator

Your next question comes from the line of David Trone.

Richard Handler

Hey Dave.

David Trone

Hi, the loss ratios in equities was thatmeaningful?

Joe Schenk

Not particularly.

David Trone

Okay, great. And the office consolidation in London that you mentioneddid that create any lumpy expenses?

Joe Schenk

Yes, we for a couple of quarters now have been running sortof close double range its not exactly double, but we have been running rent onthe new facilities, as well as the old and secondly, we've been taking somemodest charges through our occupancy cost for the abandonment of facilitiesthat we’re moving out. So the answer is we are absorbing some cost throughout2007 and our regular occupancy expense line, all else been equal, our occupancyexpense would go down to touch next year, although there are other factorsgoing on such as expansion in New York. So it won't go down fully for the dropat London butit will go surely.

David Trone

Okay, great. And could you help us understand your hedgingstrategy with your fixed income business?

Joe Schenk

In our investment grade, fixed income business, we tried torun as balanced positions as we can. I think the nature of our business isthat, its difficult to maintain in that short position for long period of time,because the nature of customer activity, but we have both long and shortpositions in that business, both naturally from the activity and because of therisk management strategy.

Richard Handler

And obviously on the high yield side, we do have long andshort this kind of facilities and natural hedge, although we will use someindexes at times when are positions are larger.

David Trone

Okay. And then one last question related, I think youmention that your commodities had some challenges this quarter and I know thatmost on the bulks guys that I covered had a pretty good period, what is -- whatdo you think the distinction is there?

Richard Handler

I think the distinction would be that our business andcommodities is a commodity derivatives business that is focused on largeinstitutional asset exposure to commodities versus a broad-based, particularlyenergy focused trading operation. A number of larger firms run very activeenergy and commodity trading, where they are trading with physical users, aswell as speculators, ours is a different type of business and whether it wasparticular to us or whether they in fact to the sense that some of them competewith us in the derivative business have several experiences us we don't know.We do know that our results were not as strong as prior periods.

David Trone

Okay, great. That was helpful. Thank you.

Operator

Your next question comes from the line of William Tanona.

Richard Handler

Hey, Bill.

William Tanona

Hey, good morning guys. Just a question for you, you talkedabout the CLO funds, can you give us what exactly those write-downs were inthis quarter? And then also, what type of exposure you may have in the form ofkind of equity tranches remaining for those funds?

Joe Schenk

We invest a comparatively modest amount of dollars in eachCLO that we do. It's all invested in the equity tranche. Today, we have, Ibelieve it's four, approximately four, it could be five and we have four, Ibelieve, live CLO’s that we are managing and the investment in each as I saidis modest, the aggregate is not a meaningful number for us. The write-down wasnot, we recognized that when you start to look particularly at our assetmanagement business, we are playing with relatively small number. So, a numberthat is a modest write-down for Jefferies, in fact, and almost a materialwrite-down, will be material to the asset management number. So, we don't giveout specific numbers, but my point is that the actual dollars, the risk is nota large number for us and the write-down was a very tiny number.

Richard Handler

We are talking still millions of dollars, that number.

Joe Schenk

Right.

William Tanona

Okay. That’s helpful. And then I guess, I know a lot ofpeople have already asked the question, but the non comp expenses, giveneverything is going on with the kind of double occupancy over the Europe, itsounds like there are some one-time expenses, but it also sounds like some ofthat stuff may be recurring. I mean should we be thinking about what we sawhere in the third quarter as kind of a good run rate, or is that a little bitelevated relative to what we should be expecting?

Richard Handler

As Joe indicated, our headcount is up about 13% year-on-yearand the expense is pretty much travel with headcount. For obviously the thirdquarter, we had lower than trend revenues. So I found absolute dollars, theexpenses are directionally where they are going to be and where they are goingto continue to be. If we saw it for long period of reduced activity, we havesome ability to attack those numbers and reduce some, but we are delicatelymanaging and I think everyone appreciates is that our goal is not to maximizethe single quarter but to maximize value over an extended period. We do ourbest for the quarter, while at the same time investing for the long term, andin those non-comp expenses as well as the comp, you have those investmentdollars as well.

William Tanona

Okay, thanks. And then I guess finally Jefferies Finance, Imean we've gone through a turbulent time here in the last quarter or so, andwe've talked about the environment bouncing back. I guess I am just curious asto how discussions are going with clients, I mean are you finding that peopleare looking for solutions from you guys more today than they were three monthsago and what type of pricing pressure are you facing or is there anything, areyou seeing that getting less competitive now given the kind of the dislocationsthat we have seen in the last three months?

Richard Handler

It's absolutely been better for us as an operator in thatmarket for the last several months. You've had a number of the largerinstitutions to some degree or even in one or two cases maybe completelyshutdown in reaction to their handling their own issues. So for us it's been a betterenvironment in terms of relationships and the opportunities. We also have totake into account the changed environment, both in terms of the service we canoffer and in our managing the risks that we are prepared to run, but it is abetter environment for us and we think it could play into our hands in terms ofour desire to expand the business.

William Tanona

And could you just remind us again a kind of what are yourtypical deal sizes, or the target market of your traditional Jefferies Finance?

Richard Handler

The Jefferies finance market is down to say $50 millionoccasionally even a little bit smaller and up to the $500 million, $800 milliondollar level where either a loan or with a partner we will leave co-leadertransaction. In some cases, we are firmly committed on an underwriting, inother cases we are working on the best efforts basis. One of the biggestchallenges that we faced is as we grow the businesses, keeping up with thevolume in terms of just the ability to process as well as the ability tocapitalize on Jefferies Finance sufficiently, but we see a broad range oftransactions.

Joe Schenk

Those are all good prompts because in realities our bankersare sourcing the enormous amount of paper and opportunities and it was a littleeye up and they are familiar with our clients in August and September when theywatch number of the biggest players in the world, they were close and we areactually working on in closing transactions.

Richard Handler

Yeah, the Scitor transaction with Leonard agreement we citeis a good example where we were representing Scitor in its sales plusrecapitalization. Leonard Green was the ultimate party to engage our man and weprovided the debt financing at the same time through Jefferies Finance.

William Tanona

Great. Thanks guys.

Operator

The next question comes from the line of Joseph Dickerson.

Richard Handler

Hello.

Joseph Dickerson

Hello.

Richard Handler

Yes. You're on.

Joseph Dickerson

Yes. I was wondering if you could quantify the markets you tookin high yield and distress trading in the fixed income?

Joe Schenk

I think what we said was we had a losses for the quarter oftotaling for Jefferies $7 million.

Richard Handler

Yeah. You can compare that to prior quarters to get a senseof what we might in better quarters have reported.

Joe Schenk

And the reality is, as I said in my comments that no one isexcited about losing money, but the fact that we were structured the way wewere, we have capital at risk and we were able to contain any major losses inthis environment while many of our competitors were having massive write downs.Obviously, absolutely we are not pleased, relatively it was a very strongperformance.

Joseph Dickerson

Yeah, that’s fair enough. I was just wondering what the actualnumber was of the mark-to-markets.

Joe Schenk

It's blended within trading and mark to – so I don’t justlook at in aggregates in terms of how the performance was? We have a tradingbusiness that is combined with some principle position so it's really notpossible for us to separate out the individual transaction.

Joseph Dickerson

So if I would say take the average of the past few quartersand then compare this quarter against, is that a fair way to look at for that?

Joe Schenk

Yes.

Joseph Dickerson

Okay.

Joe Schenk

Yes.

Joseph Dickerson

So somewhere in the $60 million number would not be way off?

Joe Schenk

That seems pretty high.

Joseph Dickerson

That seems high, Okay.

Joe Schenk

And then its -- hold on one second.

Joseph Dickerson

Yeah.

Joe Schenk

Well just a second, let me see if we have any numbers thatcan help you here?

Richard Handler

If you look at the press release we put out today for thefive prior quarters, the revenue in high yield ranged from $10 million to asmuch as $43 million, three other quarters were in the $10 million, $11 millionlevel. So it’s really a business that was averaging, maybe in low 20's overallfor say the last five quarters, you can see that in our press release bycomparison we were down $7 million. There aren’t differences across thoseperiod is to how much capital was deployed.

Joe Schenk

Although, that really -- but we generally have that similaramount of capital at this point. So those are pretty good apples-to-apples.

Joseph Dickerson

Okay, right. I got it on the high yield I was looking atthe, kind of a bottom line the $74 million number in the total fig as supposedto the high yield. And would it be..

Joe Schenk

It includes both.

Joseph Dickerson

Okay. Would it be fair on the -- in the fixed income line,the non-high yield line to apply the same analysis?

Joe Schenk

Yes, I mean you can definitely look at – its never exactly,because if you look back four, five, six, eight quarters, whatever range youwant to go, you are getting both trend and you are getting averages, yes.

Brian Friedman

I think really think about the risk profile the company is,we didn't had any one area where we had a major loss. We had small manageablemark-to-market in situations across the platform, so when aggregated there is afirm that's pretty well stressed out. If you think about it a year ago, we hada record third quarter and just have the kind of pain that we had and just haveremained shy of net earnings and revenues in this environment is a pretty goodaccomplishment given the risk and in the way we spread out our risk throughoutthe organization.

Richard Handler

In the most challenging days with the quarter, our focus wasnot on balance sheet risk being what's troubling us, but rather ability togenerate revenue in trading, that's what reflecting in these numbers.

Joseph Dickerson

Okay. No, I thought the overall your numbers were great. Iwas just trying to quantify the marks. And thanks.

Richard Handler

Okay.

Operator

The next question comes from the line of [Arbi Gosh].

Arbi Gosh

Hello.

Richard Handler

Hello.

Arbi Gosh

Hello.

Richard Handler

Yes, you are on.

Arbi Gosh

Well, thanks. A quick question on your equity tradingbusiness, could you shed some color on how you are derivative and primebrokerage business performed versus the core cash business?

Richard Handler

The prime brokerage business is in its maybe third fullquarter of operations. In the September quarter they've reached the point ofabout 90, 90 something clients. It’s not yet having a material impact on ourequity results, but it is ramping rather nicely. On the derivative side, we areagain probably in our -- we lose track at time, maybe our fifth quarter of liveoperations. We are doing a reasonable customer business there on the listedside. We are still building out our capabilities in the over-the-counter side.So it's contributing to revenue, but it is also early days, but the bulk ofwhat you are seeing in our equity business is the business that we've been infor the longer term in cash and special trading.

Arbi Gosh

Right. That’s great. Thanks. And on the investment backlog,I think you said it was pretty robust. Could you compare that versus say yearago levels and your end of June levels?

Richard Handler

Well, if you look at a year ago versus today, as has beentrue for the last several years, we are yet a larger and more robust investmentbanks. In other words, we are -- we have today versus one year ago, off the topof my head I would say 20% more professional investment bankers on the team. Sowe are a larger investment bank today versus a year ago, and the backlog isdefinitely larger and more diverse today than it was a year ago. On a period toperiod basis, I would say the momentum continues, while there are transactionsthat have been delayed, and, in some cases, postponed for extended periods oftime because of the environment. There is a truly robust level of activity.

Joe Schenk

Which is particularly encouraging after having already $230million for the second quarter, now a $190 million a quarter, the fact that westill have a robust and growing backlog says that we are making progress.

Arbi Gosh

Great. And I guess, as a follow-up, I mean how much of thathas been a non-US kind of build because obviously I know you made a lot ofinvestments in Europe. So I was just trying toget a sense of the mix of revenues, and I know you won't give me the actualnumber, but some kind of direction as to how important your non-US business is?

Richard Handler

Yeah. If we actually have in hand it we would give it toyou, but we don't have it in our hands right now. The European build-out,particularly, really accelerated in the second quarter with David Weaver comingon Board, the LongAcre acquisition, which closed in June. You are really goingto see the benefits of that, we believe, in '08 and then in the future beyondthat. So, I would say that a lot of the drive that you are seeing in the secondquarter numbers and in this third quarter banking number is domestic. There isgrowth in Europe, but I think when we talk about sort of next level of growthin Europe, that is to come.

Arbi Gosh

And I guess, finally just looking at your leverage ratioswhich are much lower than what the big buzz bracket firms have. You still havebeen kind of increasing over the last I guess six months or so I mean just whaton a net and on a gross basis. I think at the end of Q2 it was around 18 timesor so. Can you give us a sense of where that number is, how comfortable you arewith that increase, whether you are trying to kind of dial it back a littlenow?

Richard Handler

The bulk I think of what you are looking at is thesecurities finance, which is almost completely match book. So when I firstlylook at our balance sheet, we often will net the liability on the match bookfrom the asset side because it really is a direct trade-off. We've alsoincreased our repo activity, so a lot of that is pure financing transactionsand the general leverage has not really increased meaningfully.

Arbi Gosh

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Ryan O'Connell.

Ryan O'Connell

Start up by something if you could just go back to theinvestment management operation. With regard to the decline in investmentincome, I think what you said is that the write-down from the CLO’s was afactor there, but then later on the call I think you have also described thatas in modest write-down single amounts of dollars. So first question I guess iswere there other factors that led to basically the $12 billion negative numberthere?

Joe Schenk

No, they were in terms of again majority the biggest impactsurely was the CLO’s that are part of that and again remember for the wholegroup we were down $11 million, $12 million. So when we suggest that the CLOwas down a single million, that's obviously still a big component of it, surelysome of our other asset classes, as we talk about, we do have some distressedtrading within that. Obviously, we've got equity, long, short equities andagain each one of them had sort of this Rich and Brian referred to each of themhad little beats and pieces and it added up.

Richard Handler

Yeah, I mean it's pretty simple to think about thattypically with several million of our capital as risk, we are making someamount of millions of dollars and you can see that in the historic numbersranging from $7 million or $6 million to $15 million. This quarter away fromthe CLO, which in the past has always been profitable for us, we lost truly a tinyamount of money, that tiny amount plus the CLO adds up to the $11.6 million.Again these are very small numbers being added together.

Ryan O'Connell

No, I understand. That's helpful. And then also you may havetalked about this in the past, but how larger component are the CLO funds ifyour assets under management?

Richard Handler

Comparatively -- they are about, when we look at 1.4, I amsorry, $4.9 billion in terms of total, if we added them up, they are roughlygive or take between $1.3 billion and $1.4 billion to that total.

Joe Schenk

They are also recognized in the assets under management, ifthat includes the high-yield operation which is separate for our private equitybusiness which is separate?

Ryan O'Connell

Okay, fair enough. And then I guess just and this is I knowtopic -- just looking forward, what are your thoughts on the CLO market goingforward?

Richard Handler

Yeah, we have never been large players in the marketplace.We have opportunistically taken advantage of arbitrage opportunities. I thinkit will be a tough marketplace to originate prior income from, I think a lot ofpeople who are out there, and it’s very difficult to mark. Fortunately, wedon't have a bunch of it and I think we are going to slow down that componentof the capital markets for quite a while.

Ryan O'Connell

Okay, thanks. It's very helpful.

Richard Handler

Thank you.

Operator

Your next question comes from the line of Corey Gelormini.

Corey Gelormini

Thank you. A few follow-ups on the last question please. Idon't know if I heard that right, but in terms of your equity type investmentsin the CLO’s, not the amount of assets you've managed in the CLO’s, but theequity investments in the CDO-CLO stuff that's on your books. And may be thelow investment great tranche, if you do have those as well, but I am sure thisis mainly fund stuff. How much is that is on your books right now?

Joe Schenk

That totals in the tens of millions.

Corey Gelormini

Okay.

Joe Schenk

In the order of magnitude, it's again tens of millions, nota bigger number.

Corey Gelormini

And I guess in aggregate, what would be sort of the totalequity type stuff on your balance sheet, either that's proprietary, not so muchthe daily trading stuff, but stuff where you made, I mean obviously thefinancing stuff, you got a commitment there, but what would be the aggregate?

Richard Handler

If you look at the managed fund line where there is $11.6million loss for the quarter versus positive numbers in the past, our dollarsat risk there is in the 400 something million level. It's plus or minus $450million, that's invested there.

Corey Gelormini

Great. And just to get a sense of you guys are very goodwith your disclosing talking about your VaR and also your number of trading daylosses and the magnitude of those losses. Could you give us a sense of whatthat was like in the third quarter and basically compare that, I guess in thesecond quarter. Did you do anything different as certainly as the liquidity inthe market certainly became tougher?

Richard Handler

Our VaR for the third quarter is pretty consistent withsecond quarter. I mean until we actually put out our Q is not final, final butcall it approximately $8 million, which is consistent with the second quarter.If I understood your second question was what sort of actions that we tookduring the quarter?

Corey Gelormini

I guess that the number of trading day losses increase didit take less positions that you saw where things are going so you are tradinglosses stayed the same or I would think given the environment you may had a fewmore days of trading losses but…

Joe Schenk

We don't have this specifics data right in front of us, butthere is obviously extreme volatility and we spent much of the quarter tryingto minimize those swings and they could as expensive as possible. So the VaRwas consistent with historical numbers, the swing seem to be up and down a 150points every other day having, you watch as much as we did and we basicallystrive try to limit our position and managed risk and get to the store.

Richard Handler

And this is -- as you might have a manager in a firm oursize and with the transparency that we have internally, this was a significantfocus for senior management on a literally constant basis.

Corey Gelormini

So I guess in terms of the equity business, the cash equitywere you basically try to be a middleman, although you have to take somepositions over days to effect transactions. Did that segment take disproportionhead or folks pretty good, if there are levels out there that folks werecommitting to or what did you just take less in that position as the market wasmore volatile?

Joe Schenk

We did take our positions, we saw opportunities where wefelt we had hedge or client that need to facilitate something that we saw as asmart trade and we made money during the quarter doing it. So it wasn’t – itwas a mine field, but we navigated it very carefully and actually tackled that.

Richard Handler

If you looked at our results, the equity result at a $140million is pretty in line with, its little below, but pretty in line with the144, 173, 151that we had the last three quarters. The brunt of the summerissues were felt by us and clearly the asset management as we've talked aboutthe lot here, high yield obviously and as we said a bit in fixed income andcommodities, banking actually felt it a bit but still had an incredible periodand equities felt it a bit and came through with quite well.

Joe Schenk

And it’s also complicated by the fact that this summerquarter we are trading and banking and as a matter we were generally slow tobegin with. So we had everything going against this quarter as with everybodyelse.

Corey Gelormini

Thank you.

Richard Handler

And remember, ours is a September quarter here.

Corey Gelormini

Yeah. Thank you.

Richard Handler

So didn’t had a, didn’t have the benefit of June.

Corey Gelormini

Well. That's right. Thanks you.

Operator

The next question comes from the line of Erin Caddell.

Richard Handler

Go ahead.

Erin Caddell

Just a couple of questions and some of this might be, Ithink you addressed before I didn't catch everything. But, with regards to thenon-comp expense, what would be kind of a normalized trade and when do thesedouble running cost run off, and how much are those right now for the, I guessthe New York and London offices, specific to I guess occupancy and equipment,as well as, technology communications like that stuff?

Richard Handler

The Londonaccess cost for this year is probably a bit over $5 million. The…

Erin Caddell

For the year, not for per quarter?

Richard Handler

For the year, I mean.

Erin Caddell

Right.

Richard Handler

It’s more than $5 million number for the year. It'srecognized and I did say this earlier that while that duplication cost will goaway in 2008 and the dilapidation and other charges go away. We are taking morespace or have taken more space in New York. So as a growing firm, our occupancy is going totrend upward, it's aberrationally higher for 2007 because of a large overlapperiod. So, occupancy should be down modestly in '08. The rest of our expensesdo tend to trend with headcount and activity levels. Again the third quarter,we hope is operational in terms of the revenue trend. So, we are not making anymeaningful changes in our cost structure as a result of the third quarter. So Iwould say, you can look at the third quarter and or the last couple of quartersas trend/norm.

Erin Caddell

Okay. And then with the thing kind of regarding the, Richiejust a question before I guess about comp flexibility, but the comp ratioobviously kind of picked up. Would you kind of care to comment on what arenormal, or what the kind of comp ratio range is going to be, given the level ofheadcount that you expect given you are still adding people?

Richard Handler

I think, we said to people we are committed to constantlyimproving and at the same time paying our fairly to balance the business mix.So I can't tell you the exact target that we have, but it's come down considerablyover the years. We are committed to that, at the same time we want to make suregiven the mix of business that we pay our people fairly.

Erin Caddell

So would you say between 50 and 55? Could it be even thatwider range, or as a percent of revenue?

Richard Handler

Even if you look at the history for the last year or two, wehave been in the 54, 55 range. And the reality is that we have been addingpeople on a relatively constant basis for the last five, six, seven years. So,we are experienced and adapt at managing the growth. Again this period, thethird quarter, where you have a relatively sharp production in activity andtrading potential in a couple of your businesses, you can't react on any sideto that. It does reduce the comp you pay up, because the results are less, alot is going to depend on the fourth quarter and into next year if things areback at trend levels, and this won't be a factor.

Erin Caddell

Okay. One other one, maybe understood to see, what were theassets under management at the end of the period?

Richard Handler

$4.9 billion.

Erin Caddell

And so would you view the forgetting the investment incomebut the rate of asset management fees going forward would be about, what it wasin the third quarter, assuming that assets have substantial amount of flows(inaudible)?

Richard Handler

Not necessarily because, remember that we have theopportunity to earn performance fees, so we have the potential to do better onthe asset management fee level. You can see that going back to later last yearand earlier this year. There are some high water marks so there can be a littlebit of earning back before you earn your incentives, but there are incentivesattached to a number of dollars we managed.

Erin Caddell

So the investment income from managed funds is all your owninvestment in those funds?

Richard Handler

That's not our money. The investment income from managedfunds is totally returned on our money, asset management fees is received fromthird parties on their money.

Erin Caddell

Okay. Then a one more and I appreciate the long call today.What's the minority interest are the, there is an element if you divide netearnings by the number of share you get a penny lower but there's some numberthat fact out there?

Richard Handler

The fact that dividend on the $125 million of preferredstocks, you have to add back our dividends because those shares are in theshare count.

Erin Caddell

And what amount is that?

Richard Handler

$1.16 million.

Erin Caddell

Good to hear, thanks. And okay, thanks a lot.

Richard Handler

Take care.

Operator

You have a follow-up question from the line of DouglasSipkin.

Douglas Sipkin

Thanks Just a follow-up here. When I think about sort of therevenue dynamics of your business, you guys continued to do a great job inequity trading but it's unlikely that business is going to grow dramaticallyfrom current levels, fixed income trading you know can bounce around, assetmanagement doesn't appear to be growing at a fast pace. So, I guess my questionis while the banking numbers continue to be impressive, do you believe that youcan continue to grow that at 15% to 20% clip over the next two to three, four,five because it seems like, if you are going to have revenue growth probablycome from there and correct me if you guys don't think the same way?

Richard Handler

Give you a few different costs from what you said, I thinkwe believe that our trading businesses can be grown in two primary ways. One,there are elements to the trading businesses that exist in the marketplace,such as derivatives and prime brokerage that our businesses we can expand inand get share in. So, we think we can broaden ourselves and grow our numbersthat way.

Secondly, on the trading side, there is geographicopportunity, while we had trading operations in Londonfor an extended period and we have some operation in Japan. The Londonoperations, in particular, have a chance to grow, both directly and on the backof the development of the derivatives businesses, as well as on the back of thedevelopment of the investment banking business in Europe.So, we are far from giving up on the view that we can get straightforwardgrowth through effort and through expansion in trading.

On the banking side, we announced yesterday a significanthigher, a very senior guy in the consumer investment banking area. He mostrecently was one of the senior folks In the Wachovia Consumer Banking effort.We expect to announce several editions to that group over the next couple ofweeks. Consumer has been an area of focus for us but not the level that it willnow have. We will have a significant dedicated group in that area. We, as youknow, acquired the Putnam Lovell folks, we acquired the LongAcre media team. Weadded a team in Germany.So as I said before, I mean we've expanded our headcount in banking by betterthan 20% in the last 12 months. We are not going to subscribe to a specificgrowth rate, but can we have significant growth for the foreseeable future ininvestment banking? We believe so. We believe the firms that are smaller thanus will continue to face challenges and the firms that are larger than us maycontinue to shift their focus ever larger and ever narrower, the middle marketis robust and we think we can take an increasing share.

Richard Handler

Not only that, now we are seeing this quarter on high yieldand commodities is extremely challenging. We have more capital in the highyield business. We have more abilities to commit capital and to dotransactions. Our commodity business has been growing as well. The fact thatthey are both retention of period incredible volatility and performed okay is agood thing from our perspective, but we see growth in both those businesses aswell. And we are not giving up on active management. We actually have a numberof very strong managers who have done decently through a choppy environment andwe are committed it.

Brian Friedman

And we are continuing to see new managers that we areconsidering bringing into the floor.

Douglas Sipkin

So I guess, just based on your commentary as it related tobanking, you guys are going to see continue hiring right now and you're sort ofviewing the last three months. I am not saying things are going to get back toearly '07 levels, but of course team ahead in terms of hiring when you see fiton the banking side?

Richard Handler

Absolutely, we are very keen to bring in additional capablefolks, both on the industry side and the product side. Recognize that we werenot a direct beneficiary over the last couple of years of the explosion instructured finance activity.

Brian Friedman

Or mortgages.

Richard Handler

Or mortgages and further more while we have a solid effortin the private equity sponsor coverage area, we were not unduly depended on it.So we have an extremely diversified business. One of the most important thingsI would look at is the level of our M&A activity. If you think about theinvestment banking business, some of the toughest business to win is M&Aand we get a very fair share of the M&A market and there is a lot ofleverage that comes through that.

Brian Friedman

First you have our Jefferies Finance platform, which isexpanding, which is really helping to drive the bank as well. So we have a lotof components.

Richard Handler

Yeah, you can get a us going on and on, we feel its verygood. Our strategy and our potential in banking, as well as in the tradingside.

Douglas Sipkin

Okay. Great thanks for taking my questions again.

Richard Handler

Sure Doug.

Operator

(Operator Instructions)

Richard Handler

Operator, I think if we go back and take some, there areshareholders here so can we end this?

Operator

This concludes Jefferies 2007 third quarter and year-to-datefinancial results conference call. You may now disconnect.

Richard Handler

Thank you.

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!