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

Executives

Richard Handler - Chairman and Chief Executive Officer

Peg Broadbent – Chief Financial Officer

Brian Friedman - President

Analysts

James Ellman – Seacliff Capital, LLC

Douglas Sipkin - Wachovia Securities, Inc

Erin Caddell - Blaylock & Partners

David Trone – Prudential Securities

Ryan O’Connell – Morgan Keegan

KC Ambrook – Orion

Anthony Pope - NISA

Jason Stankowski - Castle Peak

Steve Stelmach – FBR

Lauren Smith - KBW

James Smith – BCap

Jefferies (JEF) Q1 2008 Earnings Call April 21, 2008 11:00 AM ET

Operator

Welcome to the Jefferies 2008 first quarter financial results conference call. (Operator Instructions)

A press release containing Jefferies’ 2008 first quarter financial results were distributed via business wire before the market opened today and can be accessed at Jefferies’ website, www.Jefferies.com.

Some of the comments made in this conference call may include forward-looking statements. These forward-looking statements may contain statements about management’s current expectations, strategic objectives, growth opportunities, business and prospects. These forward-looking statements are not statements of historical fact and represent only Jefferies’ beliefs as to future performance that usually include the words: continue, will, believe, should or other similar expressions.

Actual results can differ materially from these projected in these forward-looking statements. Please refer to Jefferies’ annual report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2008 and Jefferies’ Forms 10-Qs and 8-Ks for a discussion of important factors that can cause actual results to differ materially from those projected in these forward-looking statements.

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

Richard Handler

Good morning and thanks for joining our discussion of today’s announcements. I am Rich Handler, Chairman and 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.

Obviously, this morning was significant for us in terms of news. We are very pleased with the financing we announced where we raised $434 million in equity and expanded and cemented our longstanding strategic relationship with Leucadia National.

We have been partners in our high yield business with Leucadia and their incredible management team for eight years, and we deeply respect their leaders as two of the most talented investors of our generation.

Over the course of the past several years, we have assembled a balance sheet that others can only hope to replicate. We have raised long-term, attractively priced debt; we have issued long-dated preferred stock; and we have avoided the pitfalls of sub-prime CDOs and hung bridge financings.

We opened for business this morning with no bank borrowings outstanding: zero; and with strategic partners in a variety of our businesses to help minimize our own risk and perhaps, more importantly, we have solid core operating businesses.

So why did we just raise $434 million more of equity dollars? The first quarter of 2008 was the most brutal environment we have ever seen. The liquidity crisis and panic that has spread around the globe has devastated financial institutions everywhere. While we will shortly discuss our poor first quarter results, it is important to note one simple fact: for the nine-month period of financial panic that resulted in hundreds of billions in losses around our industry, the nine month cumulative net loss for Jefferies was only $46 million. Our shareholders’ equity at the peak of our operating history on June 30, 2007 was $1.79 billion and today, nine months of crisis and panic later, it is $1.73 billion, down 3%.

This is before today’s financing which increases our shareholders’ equity to $2.16 billion, for an increase in book value from $13.03 to $13.58 per share. Put another way, we just raised nearly ten times the amount of shareholders’ equity that we lost in the entire financial panic. Our stock price is down like everyone else, but it is clear that our foundation is rock solid.

We believe the combination of the current environment, the changing competitive landscape and the robust nature of our unique platform more than ever provides an ideal opportunity to build a great trading and investment banking firm. This [inaudible] raised draws a line in the sand identifying Jefferies as one of the best positions and conservatively capitalized financial services firm operating today. We are seeing numerous opportunities to enhance and expand our platform and now that we have expanded our permanent capital base and have the ideal strategic partner, we are positioned to drive the evolution of our firm.

Specifically, we believe this capital can help us in our delivering enhanced results as we look at opportunities in mortgages -- which we will talk about shortly -- as well as the ongoing expansion of our international business, particularly in sales and trading. In addition, these additional resources will enable us to continue to develop our prime brokerage, our senior lending arm of Jefferies Finance, our commodities platform as well as other opportunities that will come to us in the form of talented individuals and groups of individuals seeking growth and opportunity.

It should be noted that concurrent with the strategic investment by Leucadia, Jefferies -- for our 18th career Leucadia investment banking transaction -- is financing Leucadia via a 10 million share block transaction. Leucadia is registering these shares and we cannot comment further at this time.

In light of today’s news, we have accelerated the release of our first quarter results which, as with most others in our industry, reflect a period we would like to forget. As a result of difficult market conditions and the virtual closure of the capital markets, we recorded a net loss for Q1 of $61 million.

The main reasons for this loss were a quarterly loss in Jefferies high yield trading of $51 million, equal to negative 6% of invested equity; a loss of $34 million on our invested capital in Jefferies Asset Management hedge fund; and investment banking revenues of only $99 million.

Our equity and fixed income and commodity businesses were solid. Even though we lost in aggregate $46 million over these past nine months, our industry has watched hundreds of billions of dollars evaporate. It has not been easy for Jefferies. Each of our businesses has felt a pain as every asset class seems to be fairly correlated in times of panic. This is why, despite our conservative balance sheet, we’ve been taking actions to minimize losses and restore ourselves to profitability as soon as possible.

These actions include:

A painful decision to reduce our staff, primarily in our investment bank in the United States;

Reducing our trading risk and proactively reducing the capital in our US hedge fund asset management business.

We have reduced our head count from 2,566 at year end to 2,357 today, down 8% net.

Our VAR, which averaged $8.1 million in 2007 has averaged $4.8 million in the first 14 business days in the second quarter.

As of March 31, 2008 we had reduced our firm capital invested in our US hedge fund platform -- a peak of $412 million in 2007 -- to $250 million at the end of the first quarter. In the next few weeks, the aggregate exposure will be down to only $150 million.

We are treating today as yet another new beginning for our firm. We have had many of these rebirths during my 18 year tenure at Jefferies. These past months were extremely challenging, but we are stronger as a firm from bracing it head-on and doing our absolute best despite a brutal perfect storm.

After April 1, our world seems to have somewhat settled down. We are pleased that each one of our operating businesses is experiencing a return to normalcy. We have made money for the first three weeks of April and while the environment is far from robust, it is nice to get back to regular business.

We do not know what the future holds and we all know that the environment can change in a second, but we believe we are ideally positioned to build long-term value from our solid foundation.

I’d like to over to Peg Broadbent to discuss our first quarter results in greater detail.

Peg Broadbent

Thank you, Rich. We were negatively impacted last quarter in virtually all our businesses by the downward pressure on the financial markets which existed throughout the first quarter. These market conditions gave rise to markdowns on inventory positions of $112 million, predominantly in Jefferies’ high yield trading and in certain of our asset management hedge funds.

As to our individual trading platform revenue lines, equities revenues were $138 million as compared to $173 million in last year’s first quarter, with last year’s first quarter benefiting from some exceptional block trading opportunities.

Fixed income and commodities revenues, excluding high yield, were $34 million versus $46 million in last year’s first quarter.

Jefferies high-yield trading revenues were negative $52 million versus positive $10 million. It should be noted that, as a result of the minority interest in Jefferies high yield trading, our net economic interest in this loss is only $18 million.

Investment banking revenues were $99 million as compared to $170 million in the first quarter of 2007 which is a decrease of 42%. Advisory revenues included in this amount were $70 million for the first quarter, down only 13% from 2007. Asset management was a loss of $28 million as compared to revenues of $22 million in the first quarter of 2007. There were a number of things that impacted these results that Rich and Brian will address shortly.

We continue to manage and improve the cost structure of the firm very aggressively. Since the beginning of the year we have had gross staff reductions of more than 200 people. The cost of these reductions included in the first quarter results were approximately $10 million and we expect to incur over $15 million more for reductions we have already completed in the second quarter. Compensation as a percentage of revenues is skewed by the write-offs, losses and one-time comp costs.

Non-comp expenses, excluding interest expense, were $95 million for the first quarter versus $88 million for the same quarter last year. Non-comp expenses have been driven by higher technology costs primarily to support growth in equity sales and trading.

Our average headcount was 2,486 employees for the quarter ended March 31, 2008, up 10% versus the same period a year ago. We expect the reductions in headcount, as well as other cost reduction efforts that we have undertaken should help reduce comp as well as non-comp costs going forward.

Our effective tax rate for the quarter was 38% as compared to 39% for the first quarter of 2007.

Now Brian will talk about investment banking and asset management.

Brian Friedman

As Peg indicated, investment banking recorded revenues of just over $99 million as compared to $170 million in the first quarter of 2007. Advisory revenues of $70 million in 1Q08 are only 13% below the $80 million recorded in last year’s first quarter. This business, particularly our sector-driven merger and acquisition practice, continued to operate at a good pace with 36 closed M&A and advisory transactions totaling nearly $12 billion in value.

Capital markets revenues, on the other hand, were $29 million in the first quarter, down 67% from last year’s Q1 of $90 million. Consistent with the rest of Wall Street, this business was extremely subdued for both equity issuance and leveraged finance by the growth in middle market companies that we tend to serve. We did complete 21 equity convertible and debt transactions valued at nearly $5 billion during the quarter.

Jefferies Finance, our joint venture with Mass Mutual, continues to show a strong and liquid financial position. With the syndication market also quiet, we completed only three transactions during Q1, two of which were lead-manage. The portfolio of mostly senior secured loans held up well and Jefferies Finance remained profitable during the first quarter of 2008.

Looking forward, the quality of opportunities we are seeing is better than ever and pricing leverage and covenants have become significantly more attractive for lenders. We expect to continue to underwrite quality deals when we believe we can do so profitably.

While our investment banking results are lower, we believe our unique market position will continue to strengthen. Competition, particularly from larger firms, may be lessening as their own challenges caused some of them to focus their businesses in other directions. Consolidation of competitors, most notably JP Morgan’s acquisition of Bear Stearns, should benefit us in the long run.

Let me take one minute and discuss the recent news concerning our restructuring advisory group. We lost a handful of professionals from this group including the former co-heads, but we moved forward with a group of over 20 dedicated professionals led by three very experienced managing directors. Over 40 Jefferies investment banking professionals are working together today on a broad range of recapitalization and restructuring assignments and we expect this business to continue to be an active part of our overall investment banking platform.

We spoke at length and in detail on our last call about our U.S. hedge funds CD platform and its recent results. While we are committed to this business and mindful of the current volatile and negative market conditions, we are focused on protecting our and our clients’ capital. Since the middle of Q4, as Peg indicated, we have been working to reduce the amount of our capital at risk in our US hedge funds as we reassess our strategy to assure we have a sustainable plan that will meet our objectives. This has led us to close several funds and reduce considerably our capital at risk.

At the same time, we are pleased to report that as of April 1, Jefferies asset management is running a series of actively managed commodity investment strategies geared toward investors seeking broad-based exposure to commodities as an asset class. Another strategy being developed is a discretionary commodity trading strategy intended to generate favorable absolute returns. Senior management in the commodity programs group include some of the most experienced commodity professionals in the industry.

These commodity asset management products will complement the passive commodity index products currently offered by Jefferies Financial Products, such as swaps, notes and other financial instruments linked to the major commodity indices as well as to Jefferies proprietary indices. These new products will allow Jefferies to continue its leading role of providing institutional investors with opportunities for investment in commodities as an asset class.

Now I would like to turn it back to Rich.

Richard Handler

Thanks, Brian. First I’d like to make a few comments about our equity, fixed income and commodity and high-yield and distressed trading businesses and their performance for the quarter.

Our equities business showed strength in an otherwise challenging period. Our equity revenues for Q1 were down from last year primarily due to the absence of extraordinary [inaudible] opportunities that benefited that quarter’s results. Our customer equities business performed well and we believe we are seeing benefits from the investments we have made in this core area of our firm over the past two years.

Our investment grade fixed income business increased its revenues considerably during the first quarter of 2008 as it was well positioned to add value in an increasingly illiquid marketplace.

We recently announced the expansion of this group’s management team in response to the opportunities we’re seeing in this area. In addition, we are in the process of expanding considerably our commitment to the sales and trading of mortgages to take advantage of the dislocations in this market and the availability of outstanding, experienced talent. We believe a lot of money can be made in the next several years by a platform focused on relationships and based on knowledge and ability. These are examples of the opportunities available to us in the current market.

Jefferies high yield trading had a disappointing first quarter of 2008 with a revenue loss of $52 million. About 70% of those losses were unrealized and we are hopeful that they will reverse when the market strengthens. Additionally, it is worth noting that our high yield results represent a negative 6% of equity that has been invested to-date in the businesses.

We at Jefferies have been a meaningful leader in this business for 18 years and as in prior downturns, our plan is to take advantage of opportunities as they are presented and create long-term value for our partners and the firm. Results are likely to continue to be lumpy, but with the depth of experience and commitment, we are confident in the Jefferies high yield trading team.

Our firm is unique in its positioning and strategy. Our balance sheet is in excellent shape and strengthened further by today’s equity raise and our ability to add value to our increased client base has never been better. The $434 million investment by Leucadia is an affirmation of the quality the firm we have built and the scope of the opportunity that lies ahead. This additional capital is intended to further solidify our position as a leader in control of our own destiny while operating in a financial world fraught with incredible danger and unparalleled opportunities.

We made this move for one reason, and one reason only: we want to move forward and build a great firm in which our employees and shareholders can proudly participate.

Now I’d be happy to take questions.

Question-and-Answer Session

Operator

Your first question comes from the line of James Ellman – Seacliff Capital, LLC.

James Ellman – Seacliff Capital, LLC

Can you give us some detail as to why the comp per employee was the second-highest ever in a difficult environment? Could you give us an idea of why the comp to employee might actually come down going forward?

Brian Friedman

I think the best way to look at it is to take into account the trading loss number that Peg mentioned which was $112 million. A way to look at our comp is to add that back to the net revenue reported, bringing you to a revenue number in the $310 million or so range.

Then you have to take into account that as Peg mentioned, there were severance cost of -- I think the number was $9 million, $10 million -- included in the number. Then you have to take into account the fact that there was a bit of comp associated with the businesses that lose money.

So it’s very difficult to really come to a pro forma, but if you start making those adjustments and look at a normalized quarter you’ll see the comp come much closer to historic levels and back toward a rational level for a business such as ours. The first quarter is obviously off the charts in terms of the way the results skewed.

James Ellman – Seacliff Capital, LLC

But why is compensation up year over year, even if we add back the severance?

Peg Broadbent

Because we added more employees during the course of last year and we’re seeing the full impact of that during the course of the first quarter. In addition to that, the amortization of our restricted stock and our restricted stock units is slightly higher than it was in the same period last year.

James Ellman – Seacliff Capital, LLC

My second question has to do with your intangibles that you have on the balance sheet and goodwill. Considering that it has now been somewhat of a drawn-out period of difficulty in many of your markets, when is your next intangible test and what might we be expecting in terms of any writedowns in that area?

Peg Broadbent

We just actually completed a review of our intangibles and our goodwill and concluded that there was no need for any writedown at the consolidated level.

James Ellman – Seacliff Capital, LLC

So even though the markets are off, activity is down and revenue is significantly off, there is no need to change the goodwill assumptions?

Brian Friedman

The vast majority of the goodwill relates to our acquired investment banking boutique businesses and based upon results over the past periods and expected prospects, no.

Operator

Your next question comes from Douglas Sipkin - Wachovia Securities, Inc.

Douglas Sipkin - Wachovia Securities, Inc

I wanted to follow up on the compensation question and try to attack it from a different angle. Looking at the compensation relative to investment banking revenues -- because I would imagine that’s a place where there’s probably a greater amount of salaries and some sort of guaranteed level -- when I look at it as a percentage of revenues, compensation as a percentage of investment banking revenues, it was 262% this quarter versus 134% last year at this time.

I’m just wondering, can you give us some color, what’s the percentage of restricted stock/ guaranteed expense as a percentage of the total? Because it just feels like with investment banking obviously in a challenging market -- the weakest it’s been in some time -- that the comp would come down quite a bit more than it did.

What percentage of the comp pool is generated from investment banking?

Brian Friedman

I think you’re actually not seeing the mix of our businesses fully. Investment banking would have a higher compensation percentage in a period like this where its results are only $99 million versus $170 million, but if you look at our overall composition of employees and compensation, the biggest single fixed cost that we would have are the non-client facing employees. In other words, all of the support functions tend to flex the least both in number of heads as well as their compensation from period to period.

There’s going to be the greatest direct flex in our trading businesses, so long as they are successful. There’ll obviously be no flexibility in trading businesses that are not successful to the extent that the fixed costs aren’t covered. Investment banking would fall between the two. There is some amount of flexibility, some amount of fixed costs, but it’s fair to say that investment banking compensation is a minority portion of our total compensation. I think that’s about as far as we’d be willing to go in starting to break it up but it’s not a singular driver by any measure.

Douglas Sipkin - Wachovia Securities, Inc

So it’s not the biggest contributor to the comp pool, on average?

Brian Friedman

No, it’s not an overwhelming contributor; the comp pool’s a better way. In a single period, it may be the largest piece of the comp pool, but there are many pieces.

Douglas Sipkin - Wachovia Securities, Inc

You mentioned bringing down the equity in the asset management segment. Can you first tell us what it was at the end of the quarter? I know you guys threw out some numbers. Am I to take that to mean that’s what it was at the end of the quarter?

Brian Friedman

At the end of the quarter what we said is it was down to $250 million, and we say that it will be down to $150 million shortly. It was over $400 million in the fourth quarter.

Douglas Sipkin - Wachovia Securities, Inc

Did that drive some of the losses in the investment income segment or is it really just a function of just the markets? Did the process of unwinding that trigger recognition of losses or is it just that markets were bad?

Richard Handler

It’s hard to really differentiate because there are very few bids, regardless. We made the decision to close several funds and turn it into cash. So the answer to both of your answers is yes, it was a combination of the two.

Douglas Sipkin - Wachovia Securities, Inc

Just a point of clarification and I apologize. I’m just not clear from the press release who gets the $100 million in cash. Is that you or is that Leucadia?

Brian Friedman

That goes to Leucadia.

Douglas Sipkin - Wachovia Securities, Inc

Could you give us a pro forma weighted shares? I guess it would be like 160 million in that range, for the share offering?

Richard Handler

I believe we had 133 million primary shares beforehand and this would be another 26 million additional shares so that would be your math.

Brian Friedman

That’s on a primary basis. Obviously this was a loss quarter so therefore dilution does not come into account.

Peg Broadbent

But the number of shares that we had outstanding at the end of March was about 133 million. We obviously have issued 26.5 million more, that takes us to 159 million. The basis of the earnings per share calculation was on average share count throughout the period.

Operator

Your next question comes from Erin Caddell - Blaylock & Partners.

Erin Caddell - Blaylock & Partners

Can you just explain the basic and diluted share count again? Why is the average basic shares for the quarter 142?

Peg Broadbent

Yes. We’re obliged under US GAAP to publish the most conservative earnings per share figure and on that basis, the denominator that we use is the basic share count and it excludes the unvested portion of our restricted stock units and restricted stock, amongst other things. In which case, if we had included that, the average share count would be more like 150 million odd which would have actually reduced our earnings per share loss from $0.43 to $0.40.

Erin Caddell - Blaylock & Partners

Basically the price per share to Leucadia is 6031433.6/26.6? There’s nothing more complicated than that?

Peg Broadbent

That’s correct.

Operator

Your next question comes from the line of David Trone – Prudential Securities.

David Trone – Prudential Securities

Back to the share count, the end of period pro forma would be 159.3, right? That gives you a book of 1359 pro forma.

Peg Broadbent

Correct, yes.

David Trone – Prudential Securities

Since you’ve been loss making the last two quarters we haven’t really seen the differential with fully diluted, the additional shares. I know you had a lot of employee forfeitures so I don’t want to necessarily go back to the third quarter. Could you give us that differential?

Peg Broadbent

The differential in terms of the denominator used for earnings per share?

David Trone – Prudential Securities

No, I’m saying if you had disclosed a fully diluted share count, what was the differential so that we could get to a pro forma fully diluted share count?

Peg Broadbent

About 151 million.

David Trone – Prudential Securities

So the differential between 132.7, you’d add 9 million to get to fully diluted?

Peg Broadbent

No add 19. To get to 151 on a fully diluted basis; that 151 excludes the recent offering.

David Trone – Prudential Securities

So then that means right now fully diluted would be 159.3 plus 19.

Peg Broadbent

Correct, yes.

David Trone – Prudential Securities

So then your shareholder equity is about 2164 or something like that. What is tangible?

Peg Broadbent

Tangible book at the end of the quarter was $10.44 on a non pro forma basis.

Brian Friedman

That would be without the impact of the 26 million shares.

Peg Broadbent

With the impact it’s $11.42 tangible.

Operator

Your next question comes from James Ellman – Seacliff Capital, LLC.

James Ellman – Seacliff Capital, LLC

In terms of the structure of the deal with Leucadia, why did it have to be relatively complicated? Why was it not a more simple deal and why is this $100 million in the calculation?

Richard Handler

I think you have to ask Leucadia. They drove some of the terms of transaction this is the transaction they wanted to do.

James Ellman – Seacliff Capital, LLC

What is the tangible book value pro forma?

Richard Handler

We just gave that. Pro forma it was $11.42.

James Ellman – Seacliff Capital, LLC

Have you talked to the rating agencies about this transaction?

Richard Handler

Yes we have.

James Ellman – Seacliff Capital, LLC

And the quarterly results?

Richard Handler

Yes we have.

Operator

Your next question comes from Ryan O’Connell – Morgan Keegan.

Ryan O’Connell – Morgan Keegan

Unfortunately I missed some of your comments at the beginning. Going back to Jefferies, in the press release it says that Leucadia won’t buy more than 30% of your outstanding shares. Can you talk a little bit more about that and what you think Leucadia’s intentions are over time?

Richard Handler

I think you’d really have to ask Leucadia. I think the filing speaks for itself but that’s a question best directed to them.

Operator

Your next question comes from KC Ambrook – [Orion].

.

KC Ambrook – Orion

I’m just really confused about the structure of what you guys are doing today. From 10,000 feet, how does Jefferies’ giving Leucadia $100 million help Jefferies balance sheet?

Richard Handler

I think you need to look at the transaction in aggregate and see at the end of the day with the funds going back and forth, net-net, how does it help Jefferies? We have value in stock from Leucadia and we have value in stock in Jefferies and the differential was $100 million in cash. The aggregate transaction I think is hugely positive for Jefferies. Having another strategic partner heavily involved is just gravy.

KC Ambrook – Orion

Why didn’t they just issue less stock to you guys instead of you guys giving them $100 million cash?

Richard Handler

You’re going to have to talk to them. This is the transaction, how they wanted to structure it and we agreed with it.

KC Ambrook – Orion

Do you need the equity or does Leucadia need the cash? I just don’t understand the spirit of this deal.

Richard Handler

I don’t think either is the case. This is a transaction with two companies trying to make money working as partners and that’s the foundation of this transaction.

KC Ambrook – Orion

So aside from the company, Jefferies, losing $0.45 today, this deal would is like two separate incidents.

Richard Handler

Yes.

KC Ambrook – Orion

So this deal could have happened in three weeks, or three weeks ago.

Richard Handler

Yes. But they are not related. Basically we are looking at our numbers and --

KC Ambrook – Orion

It’s just it’s a very complicated deal. I mean, Lehman goes out and raises $4 billion overnight; you guys are issuing equity and buying equity and $100 million in cash, it’s just kind of hard to get our arms around. That’s why there are so many questions on it, obviously.

Richard Handler

I apologize for the complexity. We believe this is in our best interest and I believe Leucadia believes this is in their best interest.

KC Ambrook – Orion

On the comp leverage ratio, how much leverage does Jefferies have if revenues remain depressed? So you did around $200 million of revenues this quarter, right? Right around there? So $201 million of revenue, let’s call it $200 million. If revenues snap back to say $250 million versus your historical run rates in the threes, what does that imply for a comp ratio going forward?

Peg Broadbent

It probably implies a comp ratio of around 80%

Brian Friedman

It depends on the mix of revenue, but we are not sizing our team today nor building our business model around a $250 million quarterly run rate.

KC Ambrook – Orion

What type of quarterly run rate do you need?

Brian Friedman

Well if you look at the first quarter and you assume that the losses were very much of the moment in terms of the first quarter was exceptional in the nature of the trading environment and if you added back all the trading losses which would still mean that we’d be making no revenue in asset management, we’d be making negligible revenue in high yield and that’s despite having a lot of capital in those two businesses, so assuming we were still making no return on capital our revenue would be over $300 million.

As you get into the $300 million we cross the breakeven point. So if you think about our business we’re sized not necessarily for the higher levels of revenue we were achieving in the first half of ‘07 but we’re definitely not sized today to run a $200 million quarterly business.

Richard Handler

What we do is we have taken risk dollars out of the equation because the environment is too choppy; we have made painful headcount reductions and we’re trying to position ourselves as best we can to make money at a lower threshold revenue. At the same time, shoring up a balance sheet which is already pristine to take advantage of a lot of the opportunities that we’re seeing. We’re basically navigating a very tough period of time and we’re doing it from strength.

KC Ambrook – Orion

The comp ratio, I mean last quarter it was at 81%; now it’s at 130%. It just seems like if we don’t get back to a $300 million quarterly run rate in revenues you guys could continue to have problems.

Richard Handler

There’s no question if the next three months are like March we’re all going to have problems. The good news is our balance sheet is completely bulletproof and we’re going to weather the storm. I don’t think the world’s coming to an end.

Brian Friedman

As Rich said earlier, April to-date is performing reasonably and profitably.

KC Ambrook – Orion

Lehman Brothers has been pretty vocal and visible in talking about deleveraging on a gross basis, so they are trying to get down to 14 times. What is your gross leverage today?

Peg Broadbent

Our gross leverage today is about 14 times.

Richard Handler

That’s equity. It was one to one before [inaudible] I believe Lehman might be closer to 5:1. Post this transaction it was better than 1:1.

Brian Friedman

And our mix of assets is dramatically more towards matched book assets I think than most others.

Richard Handler

And then you take it one step forward and you look at our level 3 assets, it is not even the same universe. So our balance sheet is a very different balance sheet than the larger players.

Peg Broadbent

It is also worth mentioning that our adjusted leverage is only about 7.5X compared to 20X which is The Street average as far as we are concerned.

Operator

Your next question comes from Anthony Pope - NISA.

Anthony Pope - NISA

Gentlemen, thank you for having the call today. A couple of quick questions from the bondholders’ side of the equation here if you don’t mind.

First of all, I know you did mention that you had spoken to the ratings agencies and obviously you just addressed a couple of points regarding the leverage numbers at which you were running.

Two questions for you please: I am looking to get a sense again of what your target ratings are going forward?

If you could comment in a little bit more detail from your perspective, I know the question was asked earlier what did you think Leucadia’s intentions for this investment were. From your perspective, with a 30% cap, with dollars flowing out initially, can you comment in terms of how you view this as liquidity enhancing? In other words, what rights and options do you have with that Leucadia stake in terms of monetization?

Additionally, given the 30% cap, what are your intentions in terms of maintenance of ratings and maintenance of the balance sheet? Thank you very much.

Richard Handler

First and foremost I suggest you call each of the three rating agencies. We are a rating agency friendly company; we believe in our bondholders. We believe that our bondholders are the ones who give us the foundation to build our operating businesses and get returns for our shareholders. You should speak to the ratings agencies who are entirely up to speed with everything going on in the company on a real-time basis. I think they would share this perception of how we run our company.

We’ve never had a target rating with the exception of always trying to improve it and we’ve been working for the last ten years starting at BBB- getting ourselves to BBB+ and we’ve stated publicly that our goal is to constantly improve our credit rating.

If you look at this transaction, I believe when you talk to the rating agencies at least the initial response we have had so far is they view this as a way to protect an already-conservative balance sheet and they view this positively. They are aware of our quarterly numbers; they are what they are.

The reality is, that’s how we did during a horrendous first quarter but I believe that all we’ve done here is really secured our firm as one of the strongest and best capitalized from the ratio perspective, financial services firm around and we want to continue to do that for the bondholders.

Operator

Your next question comes from Jason Stankowski - Castle Peak.

Jason Stankowski - Castle Peak

What type of analysis did you do to come to a value of the Leucadia stock that you were willing to come up with or did you just take the last sale in your thought process as you analyzed the deal that they came up with the structure of?

Richard Handler

We’re not strangers to Leucadia stock. I think every single transaction they’ve done for the last 22 years, we have done. They are a very important banking client of ours. We know their track record, the number of their assets that they have on their balance sheet, assets and investments that we’ve brought to them. We’ve done a lot of work with Leucadia and they, on the other hand, know a lot about Jefferies. I think you can assume neither Leucadia nor Jefferies does anything without due diligence and the valuations were based on mutual negotiation.

Jason Stankowski - Castle Peak

You don’t have the cash. You still own the stock at this point?

Richard Handler

At this point in registration I can’t comment on anything about the transaction. My general counsel’s looking at me and telling me I can’t say a thing.

Operator

Your next question comes from the line of Steve Stelmach - FBR.

Steve Stelmach - FBR

A follow up to that $300 million breakeven number that you mentioned. How many quarters does revenue have to fall below that breakeven number before you guys begin to rethink expenses and run rate breakeven for the company?

Richard Handler

We’ve already been re-thinking and adjusting ourselves and making some of the painful decisions. We started it in the beginning of last summer and we’re realists. We are in this business to make money, not to minimize loses. We’re trying to adjust our business to make money regardless of the environment.

By the same token, we have built a great franchise and a great platform and we don’t believe this panic is going to last forever. We’re trying to walk that fine line between properly sizing the platform but making sure that when the environment stabilizes we can go back to making a lot of money.

Steve Stelmach - FBR

When you mention the $300 million, it’s more of a go-forward number in terms of your expectations rather than a historical number?

Richard Handler

It is also based on business mix. There’s a lot that goes into it. Some businesses are more profitable but in aggregate it’s safe to say we’re constantly trying to reduce our breakeven as much as possible, keep our costs as variable as possible and keep our franchise as strong as possible. That’s basically what we’re doing.

Steve Stelmach - FBR

Lastly on Leucadia, you may not be able to answer this but once the shares are registered are there any restrictions on your ability to sell those shares?

Richard Handler

There are no restrictions.

Operator

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

Lauren Smith - KBW

Could you give us please the mix of investment banking between underwriting and M&A?

Richard Handler

What we indicated was that of the 99, approximately $70 million was advisory and $29 million was cap markets.

Lauren Smith - KBW

You said 70% was unrealized of that $52 million?

Richard Handler

That’s correct.

Lauren Smith - KBW

$15 million of additional comp is what you’re expecting in 2Q related to the headcount reductions that you’ve already executed on, correct?

Richard Handler

Exactly.

Lauren Smith - KBW

Did you guys buy back any stock this quarter, and if so, how much?

Richard Handler

Nothing material.

Lauren Smith - KBW

Is there anything on the non-comp side? Are there any levers there? If it came down Q on Q, it is up year on year but is this a fairly good run rate or are you looking internally? Are there things you think you can do on that front?

Brian Friedman

We’re constantly looking, but these are really operating expenses, some of which like facility costs don’t really change from period to period. Some of it like travel and promotional and marketing costs and conference costs will vary from period to period. We’re clearly watching them closer than ever which does account for why they’re down a bit and this is probably a reasonable range, although there’s some potential to tighten a little bit more.

Operator

Your next question comes from the line of James Smith – BCap.

James Smith – BCap

I’m wondering how you view Leucadia shares at this point? Obviously you can’t be very clear in terms of whether you value this as a strategic investment over the long term or if potentially things start to go south in the macro economy and Jefferies is faced with some tougher times whether these shares would just be a source of capital.

Since you have been partners for a long time, how do you view Leucadia shares? It’s kind of a holding company with a lot of holdings that don’t seem to be particularly attractive right now, whether it be real estate investments or AmeriCredit, it seems to be a large question marks in their portfolio. I’m wondering overall how you view ownership of shares in them right now?

Richard Handler

I can’t comment on Leucadia other than to say I’ve got a lot of respect for their ability to find undervalued assets.

James Smith – BCap

There’s nothing you can say in terms of intention of the holding in terms of how long?

Richard Handler

There’s a pending registration statement. I cannot comment on any of it other than to say that we are happy to be partners with the folks at Leucadia.

Operator

There are no further questions at this time. I will now turn the call back over to the speakers. Please continue with your presentation or any closing remarks.

Richard Handler

Basically with today’s announcements we are very excited to be moving forward into the second quarter. As always, thank you everybody for your support. Have a good day.

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 Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts