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

Stifel Financial Corporation (NYSE:SF)

Q2 2012 Earnings Call

August 8, 2012 5:00 p.m. ET

Executives

Ron Kruszewski - Chairman, President, and CEO

Jim Zemlyak - SVP and CFO

Analysts

Devin Ryan - Sandler O'Neill & Partners

Joel Jeffrey – KBW

Hugh Miller - Sidoti & Company

Michael Wong - Morningstar

Operator

Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Stifel Nicolaus 2012 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Jim Zemlyak, you may begin your conference call.

Jim Zemlyak

Thank you, Mike. Sorry for the delay this afternoon. I am Jim Zemlyak, CFO of Stifel Financial Corp. I would like to welcome everyone to our conference call today to discuss our second quarter 2012 financial results. Please note that this conference call is being recorded. If you'd like a copy of today's presentation, you may download the slides from our website at www.stifel.com.

Before we begin today's call, I would like to remind listeners that this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not statements of fact or guarantees of performance. They are subject to risks, uncertainties, and other factors that may cause actual future results to differ materially from those discussed in the statements.

To supplement our financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance and liquidity, these non-GAAP measures should only be considered together with the company’s GAAP results. And finally, for a discussion of risks and uncertainties in our business, please see the business factors affecting the company and the financial services industry in the company's Annual Report on Form 10-K and MD&A and results in the company's quarterly reports on 10-Q.

I will now turn the call over to the Chairman, CEO and President of Stifel Financial, Ron Kruszewski.

Ron Kruszewski

Thanks Jim. Good afternoon everyone. The operating environment in the second quarter was challenging especially compared with the strong start to the year. The headwinds in equity and bond markets as well as macro-economic factors affected the industry, our business and client activity.

In the quarter asset management, investment banking, advisory and Stifel Bank performed well while commission stabilized and principal transactions and equity capital raising results were lower. Throughout the year, we have continued to grow through investments in selected professionals and certain businesses, namely our fixed income platform. We are well positioned with the scale and expertise to gain market share.

While the challenging environment impacted the results, we also continued to invest in growth opportunities. Before I review the financials, I would like to discuss the market backdrop. The major indices were down in the quarter with U.S. equities giving back much of the first-quarter gains as the reemergence of European credit and debt concerns increased.

The macro trends and lack of investor confidence resulted in first, lower share of volumes, next, continued equity mutual fund outflows, three, fewer new issues than lower trade volume, average daily share of volumes on the New York and NASDAQ although flat sequentially is on pace to declines for three consecutive years. Over $300 billion has been withdrawn from equity funds since May of 2010. Only 33 IPOs priced in the second quarter, which was down 35% from a year ago quarter of 51 and trade volume sequentially declined 15% from the strong start to the year. All of these underscore the second quarter difficult market environment.

I will now go through our results for the second quarter. As compared with the year ago quarter, net revenues were $374 million which were up 4%. Net income was $26.1 million or $0.42 per diluted share, compared with net income of $3.4 million or $0.05 cents per diluted share. Of course last year’s quarter included a nearly $28 million after-tax charge or $0.45 per diluted share related to previously disclosed litigation related charges and merger related expenses.

Pre-tax margin for the quarter was 12%. I will discuss the impact of our growth strategy on our pre-tax margins in a moment. Our results were lower than street expectations by 10% mainly due to higher non-comp expenses and the significant investments in our growth which again I will discuss. Net revenues were essentially in line off 1% while total non-interest expanse was 7% higher.

I am going to skip over our six month results which basically tell the same story, which was an increase in revenue with higher expenses.

Next slide compares our sources of revenue. Commission revenues decreased 8% to $127.4 million in the second quarter from $138 million last year. Principal transaction revenues increased 15% to nearly $92 million from $80 million in the year ago quarter. Investment banking revenues were up 5% to $67.4 million. The year-over-year increase was the result of an increase in advisory fees and fixed income capital raising activities, primarily attributable to our Stone & Youngberg acquisition. Sequentially, the difficult market for capital raising particularly in the last part of the second-quarter resulted in a 26% sequential decline. This decline in capital raising was almost entirely offset by increase in advisory revenue.

Looking at our brokerage revenues, commissions and principal transactions combined were flat compared with last year and decreased 9% sequentially. Year-over-year taxable debt increased 11% and muni debt increased 26.5% while equity declined 5%. As I said, the increases in taxes and muni are attributable to increased fixed income trading volumes again, as compared to last year, tighter credit spreads and our acquisition of Stone & Youngberg in October 2011.

The next slide reviews our non-interest expenses. Compensation and benefits as a percentage of net revenues were 63.9% compared to 64.1% a year ago quarter and 63.6% in the first quarter of 2012. Our comp ratio came in, in our targeted range of 62% to 64%.

Transition pay as a percentage of net revenues was 5% in the second quarter of 2012. Again this is a significant line item that I expect to decrease as a percentage of revenues as it reflects the significant amount of -- primarily financial advisors that we have hired in the last three years. As you know, our financial advisors in the five years have gone from about 500 to nearly 2000 and that's driving a very high transition pay line item in our financial statements.

Non-com operating expenses were $91 million in the second-quarter or 24.4% of net revenues. The increase in sequential and year-over-year non-comp OpEx is mainly in communication to quote data processing, occupancy client conferences and it's also attributable to investments in growth that I will detail – I will review in detail in a moment.

The six-month non-interest expenses are consistent with my previous comments. I will skip over this next slide.

I will now turn to segment comparisons. Overall results for the quarter in both global wealth management and institutional group reflect difficult market conditions but are an improvement year-over-year. The diversity and integration of our business model offset the challenging period. Revenues in global wealth and institutional group were up as compared to last year’s 6.4% and nearly 2% respectively but PCG was down 11% and our institutional group was down 26% sequentially. Global wealth operating contribution increased 10.7%, which helped offset the challenges faced by institutional group but had its operating contribution which was down 20%.

Turning to the global wealth results, again I am pleased with the results in this segment as we have operating contributions of 26%. Net revenues for the quarter were $240 million which increased 6.4% over last year. Asset management service fees increased due to an increase in total client assets. So that was really a result of the both market performance and in inflows.

Net interest revenues increased as a result of the growth of Stifel Bank and our investment banking line item and private clients were higher. Fee-based accounts increased 9% to nearly $20 billion, little over $20 billion sequentially. That was driven by higher asset levels and a 4% increase in new accounts.

Turning to the next slide on Stifel Bank, asset quality remains high. Our assets now exceed $3 billion – actually $3.1 billion as of June 30, 2012, up nearly 70% from a year ago. Our investment securities totaled 41.8 billion which was up 57%. Our loan portfolio today is over $800 million and the deposits of $2.8 billion mostly which are sourced from the brokerage, increased nearly 70% which is in line with the increase in our assets. In short, we continue to prudently grow the bank assets on a risk-adjusted basis.

The next slide looks at our institutional group. Year-over-year comparisons show that net revenues increased 2% to $135 million. Stone & Youngberg contributed nicely to our fixed-income brokerage and investment banking results. Pre-tax operating income of $17.5 million represents a 20% decrease and it also declined 26% sequentially. Margins simply came under pressure due to slower activity and an increase in operating expenses.

Turning to next slide, I will just walk you through our institutional group revenues. Our institutional brokerage revenues were $74.9 million which was up 2.4% compared with the second quarter of ’11. Our equity institutional brokerage revenues were $38.5 million which was a 7.7% decrease compared to last year, just reflecting again lower overall average daily volumes. Offsetting this decline, fixed-income institutional brokerage revenues were $36.5 million, which was a 16% increase from last year, although both of our flow businesses show the weaker second-quarter, they show sequential decline.

Investment banking revenues increased slightly to $58.8 million. Advisory fee revenue were solid $26.6 million which was up 7.2% and capital raising revenues were $32.2 million, which was a 3% decrease. Basically our fixed-income origination offset declines in our equity origination on the capital raising front.

In terms of our investment banking activity, our equity capital markets group results again reflect the environment. While we started off the quarter strong, it was really a continuation, I think as I said last quarter, I saw what I thought would be some weakness which fortunately came true. U.S. IQ activity slowed dramatically in the second half of May and the first three weeks of June with no IPO’s pricing until June 26. So that was the result primarily of almost exclusively the Facebook IPO.

Volatility increased and investors remained cautious after that. Despite the slowdown in the second half we still priced 12 IPOs in the quarter, book running five, which was over 40% which is our strategic initiative to do more book run deal, both IPOs and secondary. While the overall fee pool in the US book and equity was down 29% in the first half of ‘12 versus last year, our market share is up. We continue to, as I said, make inroads in our efforts to book run more business and grow the franchise.

With this (indiscernible) quarter I will say investors’ appetite for both yield and growth equity has improved. The capital markets business is bumpy, but we expect public issuers to pick up activity with continued market stability. Our pipeline is building a but again, the execution is dependent on the market cooperating.

Looking at M&A, global M&A environment is slowing in ‘12 with annualized volumes down 16%. We remained very active in the second quarter. We have 13 announced or closed M&A deals, including seven buy-side, six outside assignments. In addition, we've announced or closed another seven M&A deals in July and the first week of August for a total of 36 year-to-date.

Next slide looks at our capital structure as of June. As of June 2012, our total assets were $6.1 billion and total capitalization was $1.6 billion. Book value per share was $25.63. Tier 1 capital and risk weighted assets was 26%. Our debt-to-equity is 18.8%, our leverage ratio of total assets provided by total capitalization was 3.8 times while our equity capitalization, just looking at equity, was 4.5 times. And we simply continue to maintain a relatively unlevered balance sheet.

Looking at other financial data, as of June of 2012, the leverage ratio at the parent broker-dealer was 2.2%, which underscores our conservative nature towards funding in the broker-dealer while at the bank it was 13.2%, which we believe is a reasonable to fund the future growth of the bank.

From a year ago quarter we added a net 70 financial advisors. Recruiting remains active. We’ve had some great new hires and we will continue to seek opportunities to recruit top seasoned advisors. Full time associates has -- actually opposite to what’s been going on in the industry which has seen substantial decreases in headcount, our headcount has increased 5% from last year. Total client assets which include deposits, are nearly $138 billion. So a nice increase compared to June of last year.

Slide 19 looks at our Level 3 assets, as in the past majority of our Level 3 assets are auction rate securities with a carrying value of $175 million. But of that nearly $84 million are ARS held at Stifel Bank as part of the investment portfolio. So it’s not a thing that we bought versus – bought for investment versus what we’ve repurchased from customers as pursuant to our settlement as it related to the ARS matter. Other investments of about $32 million as has been consistent is a private investment held by our TWP EG subsidiary.

Before I open the call for Q&A, I want to share my view of the market for our company strategy. Numerous recent events simply have eroded investor confidence. The flash crash of 2010, the Facebook IPO, Peregrine MF global LIBOR manipulation, even last week's trading disruption at night simply have undermined investor confidence. But what I really see is a tug-of-war between what should be simply modest growth expectations and fear of deflation, those are the one -- one side being looking for slight growth and the other side being a worry of deflation results in a wide risk premium.

Risk premium, the way I'd define is, if you look at yesterday’s quote, the 2012 earnings yield on the S&P 500 is 7.4%, while the 10-year it 1.6. So that simply doesn’t make much sense to me. If you look at it, it is either deflation is going to really hurt earnings and bring the earnings yield down substantially by having S&P fall, or the bond yields are very low when you think of the 10 year 1.6% yet the 10-year inflation rate being 2.2% annual, that doesn’t make much sense.

I believe that and I think that goes to our strategy -- I believe that Europe will stabilize further, the fiscal cliff and tax issues will be resolved. Inflationary concerns will ease all of which will generally improve investor confidence. This will narrow the risk premium that I spoke about earlier in favour of that equation in my opinion.

Our company with that outlook is positioned well in a rebounding or normalized equity market. Therefore, we continue to invest as we've done over the past seven years. We're building a firm to take advantage of the restructuring of the financial services industry.

Looking at our strategy as it relates to that market outlook, our strategy is straightforward, it’s to take advantage of opportunity. We believe the events over the past years – few years provide a tremendous opportunity to build our capabilities while gaining market share. Simply the structural changes required by Dodd-Frank and Basel III will require the large global firms both shrink and restructure their businesses in order to be capital compliant while also achieving acceptable return on invested capital. The new regulatory framework generally does not burden Stifel and our unlevered balance sheet provides an ample dry powder to take advantage of opportunities.

We’ve built this business over the past several years by prudently evaluating opportunities and executing on those that provide acceptable risk adjusted return on investment, always measured on long-term basis. We plan to continue the simple -- proven effective plan for us. We are well-positioned to gain market share.

However, the execution of our ongoing strategy has impacted our margin. Year-to-date we've hired 103 financial advisors. We have opened 12 private client offices and since last year – June of last year we opened 25 offices. We have lost money in making these investments. They have impacted our margins but we expect these offices to turn profitable.

We’ve also made significant investments in fixed income sales, trading and research, an area we’ve hired 52 professionals so far this year. We’ve also selectively hired senior investment banking professionals and research analysts in areas where we believe their expertise are going to have a meaningful impact on our franchise. Additionally, we’re also evaluating some underperforming businesses.

Next I would like to illustrate the impact of our investments the way I look at it. This slide shows what I will call a legacy or core businesses separated from the revenue generated expenses paid for investments in new businesses and new hires. In the six months ended June 30 of ‘12 our core business increased – the revenues decreased 7% with a compensation ratio of 62.7% and importantly pre-tax margins of 15.4%.

Revenues generated by our new investments were approximately 14 million while total expenses were $28 million, impacting earnings-per-share by $0.13, dropped our margins nearly 200 basis points. We expect that these investments will generate profit and will get to our normalized return margin, which are 15% and we expect them to increase revenue especially on the private client side.

Also as I mentioned, we’re viewing certain businesses that are underperforming. Bottom line, we are growing in this market.

One last topic I would like to address before Q&A is our investment and capital. We invested $30 million that converts into 20 million common shares of (indiscernible) $1.50. Until we convert we will see the 2% dividend. I have been asked a lot of questions until why we did this. From my perspective it was financial investment that was both attractive but importantly, we participated in industry solution for Knight with a major market liquidity provider. We do not have a board seat at the NASDAQ cluster.

In conclusion, I am confident in the second half of 2012. Some of our new businesses will start to generate increased revenues and profits. On last quarter’s call I was cautious given future expectation. Today however I believe expectations have come in line with the current environment. I expect the environment to actually improve and therefore I am optimistic as I sit here today.

Stifel continues to grow through hiring, opening offices and expanding capabilities. We're evaluating underperforming businesses and know we have work to do on our non-cash expenses, but overall I'm pleased with the performance of our core business and believe we are well-positioned to gain market share.

I will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Devin Ryan [Sandler O'Neill & Partners].

Devin Ryan - Sandler O'Neill & Partners

Just wanted to have a follow up on the comments about you have some businesses that are currently underperforming. Can you give a bit more detail on what businesses and kind of what you are thinking there?

Ron Kruszewski

I don’t want to – suffice it to say I don’t know, naming or what purpose that would serve. We’ve already actually got it, okay and are continuing to do it. I think that some of the things that happened that impacted the first half results or second-quarter results, we think we restructured to a certain extent that but they did have an impact on our results there, they are in those numbers. But I'm not -- I don't think it serves any purpose to actually provide any more detail Devin.

Devin Ryan - Sandler O'Neill & Partners

And then just you referenced this in your prepared remarks, but obviously week after week what we are seeing the money moved out of equity mutual funds, and just want to get your perspective from the behavior that you are seeing from retail clients and maybe hearing from your advisors, it sounds like you think equity markets will see a better day. So I guess is it fair to say that you think that lot of what we're seeing right now in terms of money flows, it’s more cyclical than secular?

Ron Kruszewski

Well, secular, actually it’s been going on since May of 2010. I guess that the way I look at it is I think there is a lot of the events in the world events have had a huge impact on top and whether it be the things I mentioned that actually impact confidence, to what you constantly read about – there is a unstable situation in Europe, a fiscal cliff, all of these things result in my view and I don’t know how way up but equity outflows, I think we’ve only had two, maybe three months where we actually had an inflow since May of 2010, $330 billion I think the number of the equity outflows. That has impacted issuance and equities have impacted share volumes. And I don't believe that equity outflows are going to continue there.

I think that they're going to stabilize. I think that when you see, what I feel is going to occur, I believe Europe will stabilize. I believe they will, they’re not going to come up with one solution every day. You see where they move toward a solution which is going to be effectively ramping all of that. But when that happens and when I believe that the fiscal cliff will be resolved, the election uncertainty will go away. All of these events are going to help but the market are already sensing today, which is undervalue of equities. That’s why I think you are seeing a rally despite all these things. So I actually think that the markets will improve from here. Is it going to be gangbusters robust? No but it does not justify the disparate returns between equity returns measured by earnings to price versus the 10-year makes no sense to me. And I think that the environment will improve.

Devin Ryan - Sandler O'Neill & Partners

Within the results of principal transaction, equities were down 60% from last quarter. So what was that mark driven and then then also within the taxable line item although it’s down 22%. So can you just show a sense of how much may be some of the software in principal transaction was driven by a function to some mark to market issues more or so than slower clients?

Ron Kruszewski

Well, one is definitely slower volume. We also -- we changed trading systems in January and there is a little bit of ex-geography, I’ve had comp couple of times as it relates to the way we do things. In many ways, I think you need to combine principal and commission, when want to get a true picture of all of what's going on, but the short order there is an equity, they are slower, fixed income, certainly a little bit better with Stone & Youngberg. But don't read too much into that.

Operator

Your next question comes from the line of Alex Holstein.

Unidentified Analyst

So kind of go back to some of the things you were talking earlier, would you view on the market rate, and I guess your view on balancing building of the business and clearly top revenue. I guess from our perspective what needs to happen and what do you guys need to see from a top line dynamic to slow down the growth of expenses to start protecting the margin a little bit?

Ron Kruszewski

Well, what I was trying to be with Shell (ph) was that I think the viewpoint at the highest top level, the highest level that I kind of them is I believe that they are restructuring in the industry provides up a lot of opportunity to grow this franchise. And therefore I do not believe that I don't come to work everyday thinking that the markets are in a secular design. I believe that the factors that have impacted investor confidence. And coupled with Europe in the fiscal of packs have weighed heavily on the ability for markets and I believe that they will generally improve from here.

And therefore that gives me confidence to continue to invest in opportunities and to sacrifice some margin today for our increased profitability later. If you remember and go back to 2009 or ‘10 when we opened from hundred offices and hired 700 people, the margins in our private client business declined from 25% to 16%. Yet today they are back to 26% on significantly higher profit. So the investments we are making today are to build a better more profitable firm on a per share basis for our shareholders, and that's just the way it is. And if you want to take exception with that, it would be that we are continuing to build this firm and maybe some will believe that markets are not going to return. I'm not in a can.

Unidentified Analyst

And then you spoke about the fact that leverage in the business is clearly a competitive advantage for you guys as in from the perspective that you could add leverage while the others is shrinking, can you be a little more specific I guess what business areas you're trying to grow more from a balance sheet perspective? Clearly the bank is one of them but is there anything else you're doing to add leverage on your balance sheet and I guess what kind of businesses you are trying to take advantage of off there?

Ron Kruszewski

I think there will be opportunity to increase, the broker-dealer is way under levered at two to one. I mean it’s way under levered, but we are very cautious the funding markets are volatile. Frankly, the ability to fund pure broker-dealers with what’s happened in recent years makes it I think little bit prohibitive to be adding leverage in the broker-dealer. On the other hand by adding leverage in the bank which is what we've been doing, our assets are over $3 billion, we are funding that with very low cost deposits.

And so you'll see that bank continue to grow. I think I said last quarter I expected to be $3 billion, I expected to grow from here, and that's where we are adding leverage although we are not taking a lot of risk. For now, that's what I see the balance sheet of expanding when you compare the two peer group, we are still under levered even in the bank compared to our overall coverage ratios. So an increase of couple billion dollars, you take the net interest margin, you want to assume we don’t have to raise capital to do that. And we can increase our earnings per share to get to peer levels of leverage. So that’s the way we are looking at it but we’re not looking at starting trading operations in the broker-dealer.

Unidentified Analyst

And then just one numbers question, we’re kind of always halfway through the third quarter now, activity levels haven’t really picked up and the market is certainly better. How do you think about I guess expense to back half of the year, or should stick to that comp rate kind of the 64-ish percentage I guess since the back half but then a on a non-comp side is the 90-ish non-comp number from just overall dollar perspective, is that kind of the outlook for the next few quarters as well?

Ron Kruszewski

Yeah I think that’s fair, I don’t know the 64, but I think it’s at the high end of the range that we have given. So I would still say that that would be at the high end of the range. No, look at non-comp expenses are hard because what happens, they lead in any time of the investment business, what comes first – the non- OpEx you have to open the offices. We’ve opened a number of offices rent start Sunday one. Revenue does not always come in.

The non-comp OpEx tends to be a little bit more difficult. I was commenting the other day when our non-comp OpEx a few years back was $20 million a quarter versus 90. So that increase has been a very good increase in the non-comp because it’s been tied to revenue and profitability. But we don’t answer directly I think the 90 is fair. But as we make investments or acquisitions that number is going to change. I hope that number was higher. I just wanted to go lower as a percentage of revenue. We need to work a lot but I will tell you the percentage of non-comp to revenue was not acceptable or it was going to be what I am trying to tell you and looking at these things as we made investments where we have got the OpEx but revenue has yet to come in, certainly on the run rate that we expect.

Operator

Your next question comes from the line of Joel Jeffrey.

Joel Jeffrey - KBW

Sticking with the expense line of questioning, can you just give us a little bit of color on the increase in other operating expenses, quarter to quarter what really drove that?

Ron Kruszewski

It’s a combination, we’ve been looking at it, we had not raw material but material, when you are trying to explain it, that’s why it was a combination of some of the investments coming in. And we had a couple of credits, again not significant at the quarter last quarter but it does look more significant when you're trying to explain a $5 million increase. So it’s a combination of maybe last quarter would've been, if you compare them apples to apples a little bit higher than the rest would be an increase in our investment.

Joel Jeffrey - KBW

And then in terms of the investment you got made in the Knight, where on the balance sheet you are holding at, that’d be in the trading securities or available-for-sale and what are the impacts on the income statement going forward?

Ron Kruszewski

Well, I hope it has a positive impact on the income statement. I would think that first, I think we are holding investments, probably of a quarter as part of our institutional group since I view it as a capital raising banking type transaction. And I believe that we will need to mark that to market. Okay today we have – subject to market conditions, but today we have 20 million shares with cost of $1.50, and the market is not $1.50.

Joel Jeffrey - KBW

So the unrealized gains would impact the income statement next quarter?

Ron Kruszewski

Last I check you --

Joel Jeffrey - KBW

Well no, it was an available-for-sale –

Ron Kruszewski

Well, no, that’s a fair question although you can't hold equities in the bank and available-for-sale at the bank, is the bank accounting. We do have different accounting between the banks and the broker-dealer. What’s held in the broker-dealer we mark to market daily. The bank can have available-for-sale and not – and run it through what other comprehensive income or whatever it is. But that’s not the case, I am sorry to dance your question directly. The mark to market will flow through the income statement.

Joel Jeffrey - KBW

And then lastly, on the investment you’re talking about and appreciate some of the timing comments that you made about it breaking or potentially becoming profitable in 2012. Do you think that would be enough to offset the loss you guys sort of talked about in the first six months of this year or next year?

Ron Kruszewski

You mean in that legacy line item?

Joel Jeffrey - KBW

Yes, line item of the investments.

Ron Kruszewski

Absolutely.

Joel Jeffrey - KBW

So you believe those investments could move, that line would be a breakeven number in 2012 – by the end of 2012 or in 2013?

Ron Kruszewski

By the end of 2013, on a same store by (ph) basis, that same thing than as they do now, I would expect them to make money.

Operator

Your next question comes from the line of Hugh Miller [Sidoti & Company]

Hugh Miller - Sidoti & Company

Just I guess I had a question that wasn’t touched upon with regards to some of the strength you are seeing in M&A especially given the global market that we are seeing in the trends, are there particular areas that you are kind of seeing that pockets of strength and to do advisory business or is it pretty spread across the board?

Ron Kruszewski

Our M&A business obviously tends to lumpy as most firms like – even the big firms have lumpy M&A. I think what you're seeing in M&A for us is the strength in our franchise. As we build our franchise, we've added a lot of capability and a lot of capability on advisory as well as capital front. So I'm pleased when I see the level of M&A and the type of transactions that we’re doing.

So we've done some buy-side transactions where we've competed head-to-head with some large firms that have bridge financings involved that we’ve been involved with, that have a number of debt take-out, things that we were unable to do even two years ago that we’re doing today. And so that's what I like about the progress that we've made on that front. And I would say that we have a lot of market share that we can again on the advisory side.

Hugh Miller - Sidoti & Company

And if what you are commenting about kind of focusing on the non-comp costs and kind of already doing some of that restructuring, should we expected to see types of charges in the third quarter based on that restructuring effort or will that not be material?

Ron Kruszewski

I don’t expect it to be, it's not material and see a lot of it’s done.

Hugh Miller - Sidoti & Company

And a lot of questions were asked on the expense side, it seems as though a lot of it running on the non-comp primarily in the institutional group. I know you talked about some investments in that but is there anything in particular you can just provide some color on areas that we are running higher?

Ron Kruszewski

Some of the things that we were looking at that we’ve already talked about resided in the institutional group, okay in terms of -- some of it is investments, some of it is review of businesses. So I don’t know that I have any more color than that, other than we will go back to say that – I want to reiterate I was debating to put it in for you guys but you can go back and look at our historical PCG that’s where it’s most evident is when we made those investments in PCG, what happened to our OpEx and our reported margin, how fast they – how fast OpEx grew and how quickly our margins shrunk in that year to 18 months period when we made all those investments.

And then conversely how fast revenue grew without OpEx growing that took our margins back to 26%. That’s the way I think about a lot of these things and we are making investments in this market. There is a slew of opportunity for a firm positioned as we are unlevered to take advantage of the restructuring that’s going on, and we intend to do that. And that's what we’re doing. It is just that when you do it in a market and in a market environment in Q2, those investments stand out on margin compression. We’re still going to do them.

Hugh Miller - Sidoti & Company

And I guess speaking on the PCG side of business, I know you guys were able to grow headcount in the quarter, we were hearing from one of your competitors about just kind of seeing a noticeable improvement I think during the quarter with the recruiting environment and just interest given that some of the larger firms were seeing their advisors and the retention awards coming towards the end of that life span. I was just wondering if you could talk about what you're seeing and I guess how competitive is the upfront money now relative to what you’ve seen in the past for recruiting those advisors?

Ron Kruszewski

Well, first of all I think environment is definitely improving, it’s going to improve because part of the restructuring that’s been going on at the very large firms is going to impact their private firms -- private wealth management segment. And so we definitely see an increase in recruiting opportunities. We also have seen that maybe be the FX recruiting deal back at the end of last year. So we see that softening, so I would echo those comments as to what we are seeing.

That often gets dampened by difficult market conditions because it’s hard to recruit and move people in and out of markets. So it’s a little of both but certainly on balance recruiting environment is better.

Operator

Your next question comes from the line of Michael Wong [Morningstar].

Michael Wong - Morningstar

Hi, Michael Wong from Morningstar. So I noticed that your institutional group commission revenue, just that specific section was up about 20% sequentially when industry equity trading volumes were flat. And it looks like the breakout of your equity and fixed income brokerage were down. So can you just talk about how that knocked out?

Ron Kruszewski

Michael, as I said, there are -- we've had a little bit of geography issues when we moved the system. It’s all related we had in the year past where we don't principal trade, we don't take a black box market risk. But there is a technical regulation on road show that we have last year that when we got it in the right geography in the balance sheet, we then changed trading system in January of this year to completely roll out a new trading system. And I think some of that geography was there and I would look at commissions and principal transactions together.

Some of it is there but overall our equity volumes were down. So if you look at, you combine equity principal and equity commissions, you are going to see that they are down.

Michael Wong - Morningstar

So looking at headcount, if I take the headcount growth year -- growth this year so far, and take our the net increase in financial advisors and the 52 people you added in fixed income personnel. It looks like headcount outside of those two focused areas was about 6. So outside of those two focused areas, are you expecting headcount to go down as you structure little more? Are you planning to add there or add more especially to let’s say your institutional group in order to bring the institutional group operating contribution closer to your previous goal of let’s say 60:40 split between the institutional group and global wealth management?

Ron Kruszewski

Well, we are making investments. You’re coming net of 6 people absent those focused areas. The focused areas are our revenue producing people. My view on it is that our current infrastructure, our current support infrastructure is adequate to add a lot more producing people. We have a lot of leverage in the firm that we have today. So the fact – that’s part of what I am trying to point out is that we have hired a lot of those net increase are all revenue producing people. OpEx has got here before revenue which always happens. And we've not hired a lot of people in support which we don’t have to. We feel that we can add revenue people and on the margin those are good hires.

Michael Wong - Morningstar

Last question from me, so looking at the transition pay, which had that 5% drag, was disproportionate and a lot of that related to I guess the UBS financial advisors or was that related to just the normal hiring of financial advisors?

Ron Kruszewski

It’s question that probably needs to answered little bit deeper but I'll try to give it quickly. I guess what I am trying to say is transition pay in a growing firm is always going to be there. However we have grown from -- in a few years we've grown from 500 advisors to 2000 advisors, such is the point we have a lot of transition pay and normalized transition pay isn’t almost 6, it’s probably say it’s 3 or 4. And so that’s what I am just trying to point out is that we have done a lot of hiring. We got the UBS transaction, we hired 800 people in that year, and we were on a real hiring.

And so when you go from 500 to 2000 transition pay as a percentage of revenue was higher than it would be in a normal growth environment. That’s what I was trying to point out. But it doesn’t go away unless we quit hiring. And then it eventually goes away.

Operator

There are no further questions at this time. Mr. Kruszewski, I turn the call back over to you.

Ron Kruszewski

I would like to thank everyone for their interest in our company and I want to end again by saying that last quarter when I looked forward, I felt the street was more optimistic from what I saw. And today I feel the optimism is more than what I am seeing in activity and optimism. So I will leave you with that thought. We will see how it all plays out. With that, talk to you next quarter. Bye.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stifel Financial's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts