JMP Group's (JMP) CEO Joe Jolson on Q4 2015 Results - Earnings Call Transcript

| About: JMP Group (JMP)

JMP Group Inc. (NYSE:JMP)

Q4 2015 Results Earnings Conference Call

February 12, 2016 10:00 AM ET

Executives

Andrew Palmer - Head, Investor Relations

Joe Jolson - Chairman and CEO

Ray Jackson - CFO

Carter Mack - President, JMP Group

Analysts

Doug Doucette - KBW

Operator

Welcome to JMP Group's Fourth Quarter 2015 Earnings Conference Call. Please note that today's call is being recorded. [Operator Instructions]. I'll now turn the call over to Andrew Palmer, the company's Head of Investor Relations.

Andrew Palmer

Good morning. Here with me today are Joe Jolson, JMP Group’s Chairman and Chief Executive Officer; and Ray Jackson, the company's Chief Financial Officer. We're joined by Carter Mack, President of JMP Group; and Mark Lehmann, President of JMP Securities.

Before we get started, I'll note that some of this morning's comments may contain forward-looking statements about future events that are out of JMP's control. Actual results may differ materially from those indicated or implied. For a discussion of the uncertainties that could affect our future performance, please see the description of risk factors included in our most recent 10-K.

With that, I'll turn things over to our Chairman and CEO, Joe Jolson.

Joe Jolson

Thanks, Andrew. 2015 ended up being a much more difficult year than we had envisioned due to the downturn in the U.S. capital markets. It was best evidenced by the Russell 2000's 25% decline from its 52 week high achieved in late June. Consequently, in the second half of 2015, equity capital markets fees fell by 46% year-over-year across Wall Street and by just 29% for JMP Securities, which experienced a sharp decrease in revenues and an operating loss of $0.14 per share for the fourth quarter, which included a compensation charge of $0.12 per share after tax.

Thanks to a diversified business model and the good performance of our investments at the publicly traded partnership level, we were able to achieve -- sorry, we were able to offset the disappointing quarter at JMP Securities and to report operating EPS of $0.04 a share for the fourth quarter and $0.55 a share for the year. While the U.S. capital markets have continued their downward trajectory thus far in 2016, which of course could impact our new term results we are experienced at managing through down cycles and have taken advantage of opportunities presented by them which could allow us to emerge in a stronger competitive position when conditions normalize.

Our senior management team and Board of Directors are well aligned with shareholders and have continued to increase their personal investment in the company's stock through open market purchases, bringing the combined ownership to more than 43% at year end and more so far this quarter compared to just 27% which is a pretty big number at the time of our May 2007 IPO.

I'll ask Ray Jackson to go over some financial items and Carter Mack will walk through some investment banking highlights, before I continue. Ray?

Ray Jackson

Thanks, Joe. Adjusted net revenues which exclude certain non-cash items and non-controlling interests were $29.7 million, down from $41.4 million for the fourth quarter of 2014, primarily due to declines in investment banking revenues and asset management related incentive fees. Operating net income was $1 million or $0.04 per share, down from $4.6 million or $0.20 per share. For the full year, operating EPS was $0.55 compared to $0.72 for 2014. From an expense standpoint our adjusted compensation ratio was 74.4% versus 60% for the fourth quarter of 2014.

This ratio excludes two items; first, any hiring costs related to strategic growth initiatives, while there were some in 2014, there were none in 2015; second, any hedge fund incentive fees, since the vast majority of these fees is passed through to the investment teams earning them. Excluding the unusual compensation expense which Joe already mentioned, the ratio of 74.4% for the quarter would have been 61.1%. For the full year the ratio was 67.4% compared to 63.4% for 2014. Our adjusted non-compensation ratios were 22.5% and 18.7% respectively.

Our adjusted operating margin, pretax operating earnings over adjusted net revenues, was 9.7% for 2015 compared to 15.1% a year before. As for our balance sheet, our recourse debt-to-total capital ratio was 43% at December 31. Shareholders' equity, all of which was tangible, was $125.1 million with book value per share ending the year at $5.77 resulting in a 2015 ROE of 9.3%. Our regular cash distribution for the first quarter 2016 has already been declared and remains at $0.12 per share unchanged from the fourth quarter.

During 2015, we paid out of total of $48.06 per share in regular and special distributions and we processed 775,000 shares at an average price of $5.72 per share. Carter?

Carter Mack

Thanks, Ray. I'll take a minute to provide a bit more detail on our investment banking results for 2015 and how we're positioned heading into 2016. As Joe mentioned, our results of the JMP Securities were heavily impacted by the downturn in U.S. equity capital markets in the second half of the 2015. We saw broad-based decline in IPO and follow-on equity issuance across all of our industry verticals but particularly in the life-sciences sector, which had experienced a very good first half of the year. While our M&A advisory business performed reasonably well with $3.6 million of revenues in the fourth quarter of 2015 and [indiscernible] which we had expected to close in the fourth quarter instead drove into the first quarter of 2016.

Our real estate financial services and technology industry groups all experienced down revenue years in 2015 versus 2014 and in financial services and real estate we've experienced a multiyear decline in equity capital markets issuance, which has historically been a larger contributor to revenues for those industry groups given the sub-factors we cover. When measured by total proceeds U.S. equity issuance in the real estate financial services and technology sectors fell by 33% on a combined basis in 2015. The number of technology IPOs fell 48% from 58 for 2014 to 30 for 2015 in the overall U.S. equity markets.

In response to this decline in ECM business in these industry groups, our bankers have increased their efforts to build our M&A, convertible and structured private capital raising businesses over the past two years. The shift in focus is taking time as bankers build their pipelines of engaged transactions and bring them to close, but we're starting to see these efforts bear fruit in more robust M&A and structured products pipeline going into 2016. We're encouraged by our growing pipeline of M&A engagements and our capital markets calling efforts have been focused on alternative capital raising solutions for our clients given the dislocation in the public equity markets.

We're pitching our convertible capital markets, structured private placement and debt placement and capabilities, many of our clients expect us to play an active role and increase investments in these product areas in 2016. As our calling effort has shifted due to change in market conditions [indiscernible] past few years we have become less reliant on follow-on public equity issuance in financial services and real estate and on IPOs and technology to achieve our internal revenue targets in those areas.

At the same time if the public equity markets rebound and the equity capital market window reopens in the next few months, we will expect to see some of our large pent up pipeline of IPO and follow-on business built over the past six months start to come to market.

Thanks, back to you Joe.

Joe Jolson

Thanks, Carter. JMP Securities have been the primary driver of revenues and earnings in recent years as we benefited from the upswing in U.S. equities and increased our market share of ECM fees by more than 70% since the end of the last up cycle in 2007. In fact 2014 was JMP Securities' best year ever with record adjusted net revenues of over $108 million, operating earnings of $0.48 a share and operating margin of over 16%. While we have been concerned about the frothiness of the equities market since mid 2014, JMP Securities still managed to post reasonably good results in the first half of last year, thanks to a continued bull market in the life-sciences sector.

Unfortunately since late June, we have entered a property based bear market in smaller cap gross stocks, our primary business focus, as best evidenced by a median 38% decline among the stocks in the Russell 2000 Index from their 52-week highs. This sharp selloff caused a year-over-year decline of almost 50% in the number of U.S. IPOs last year and a decline of 47% in total ECM fees for the second half of 2015 in United States. While JMP Securities ECM fees dropped "just 29%" for that period, we had expected a stronger close to the year and after careful consideration we determined to pay our top producers fairly in a somewhat disappointing year which led to the compensation charge of $0.12 a share in the fourth quarter.

The charge was tempered somewhat by material reduction in management bonuses as well as a 75% cut in profit participation for senior management. Thanks to a diversified business model and the good performance of our investments at the publically traded partnership, we were able to offset the disappointing quarter at JMP Securities and to report EPS of $0.04 a share for the fourth quarter and $0.55 for the year. In 2015 in total distributed $48.06 per share in cash payments to shareholders, so it was worked out to roughly an 88% payout ratio on our operating EPS.

In addition to the cash distributions, we spent $0.205 per share to repurchase stock, bringing the payout ratio to a 126% on considering our total return to capital. Longer term, we continue to target cash distributions of at least 50% of EPS and would expect to retain more capital once earnings levels normalize at JMP Securities. Earnings for the publically traded partnership were $0.51 per share in 2015 on a standalone basis which was a cash payout ratio of roughly 95%.

Our asset management platforms Harvest Capital Strategies, HCAP Advisors and JMP Credit Advisors earned a fully taxed $0.05 a share for the quarter and $0.12 for the year excluding net investment income. That worked out to a return on equity of almost 33%. Asset management related fee revenues fell 46% last year to $23.3 million because of a steep decline in incentive fees for Harvest Small Cap Partners which nevertheless was up a respectable 6.2% net last year but had to compare against a record net return of 30.8% in 2014. Since the vast majority of these incentive fees are passed through to the investment teams, the decline in our top line had only a modest bottom line impact and operating EPS at our asset management businesses were essentially flat versus 2014.

Total client AUM including sponsored funds from which we earn fees equaled $2.8 billion at year end up nearly $280 million or 11% from a year earlier. Hedge fund client assets including sponsored funds decreased just 1% during the year ending 2015 at just shy of $900 million. Despite the return of $96 million in capital from the closing of Harvest Opportunity Partners II in the ongoing liquidation of the JMP Masters Fund as well as the [Bow & Perry] return of $78 million in profits to investors in Harvest Small Cap Partners. Excluding these actions our hedge fund client assets under management with sponsored funds included would have jumped 18% last year.

JMP Credit Advisors currently manages three CLOs and one total return swap totaling roughly a $1.1 billion. At year end 32% of our sponsored AUM was in hedge funds and 68% was in private capital strategies. In January we announced the final closing of the Harvest Intrexon Enterprise Fund with $245 million in commitments, the most successful fund launched in our history. The fund invests exclusively in companies that utilize the proprietary technologies of [power foods] traded in Intrexon Corporation, a leader in synthetic biology. We're very excited about the fund's prospects as well as the potential long term benefit to JMP's franchise value we've successfully executed upon, since the strategy leverages our expertise in early stage life sciences companies across the broader organization.

We plan to replicate the potential companywide synergy achieved here with fund strategies that leverage our other core industry verticals in the future. For instance this year we're hoping to close our first Real Estate Opportunity Fund. We've already made three seed investments totaling roughly $5.3 million which we believe could catalyze initial investor demand and will be contributed to the fund upon its first close sometime this year. We continue to look for opportunities to launch or partner with other differentiated fund strategies as 2016 unfolds. In addition to a strong quarter in asset management we had good returns on the capital we invested in our hedge funds and in our CLOs of 4.1% and 5.3% respectively, which were partially offset by a negative return of 4.4% on our total return swap facility due to unrealized mark to market losses that have plagued the broadly syndicated bank loan market.

Including our hedge funds, CLO securities, principal and other investments, our return on invested capital was still 3.3% for the fourth quarter which compares to a return of 77 basis points for the HFRI fund-of-funds Composite Index which drove our net corporate income of $0.14 a share in the quarter and an annualized return on equity of 12.4% for the period. For the total year we generated a return of 5.7% on the capital we invested in our hedge funds versus a decline of 87 basis points for the HFRI Equity Hedge Fund Index and a total loss of 4.4% for the Russell 2000. Including our hedge fund investments, CLO securities, principal and other investments, our total return on invested capital last year was a pretty good 13.5%. Net corporate income which is net investment income less all of corporate expenses contributed $0.30 to our operating EPS of $0.55 for 2015, weighed into a return on equity of 6.4%.

As always I want to finish by thanking JMP's employees and independent directors for their dedication and hard work. Despite severe headwinds in the second half of last year we maintained profitability in each quarter and covered our cash distributions with net investment income at the publically traded partnership. While we cannot predict the depth and duration of the current downturn, we are prepared to weather this storm and will remain focused on identifying attractive growth opportunities that could benefit JMP Group over the long term. I look forward to sharing our first quarter results on our next call in late April.

Operator, we can now take any questions.

Question-and-Answer Session

Operator

Certainly, [Operator Instructions] And your first question is from Doug Doucette with KBW.

Doug Doucette

Just a couple of questions. First, just trying to get a sense of how much of your comps rate is fixed versus variable?

Ray Jackson

It depends obviously on the year, this year our fixed comp was higher than it had been over the last few years because of the shortfall on the revenue side. So, I would say this year it was a little bit less than half this fixed comp and comps -- fixed comp is primarily salaries and benefits, not large guarantees.

Doug Doucette

Just have two more here. With the stock trading at discounts to tangible, does that change your capital return plans at all?

Joe Jolson

Well we did buyback, I don't want to again do this, its 730,000 shares in the quarter and most of that was late in the quarter when the stock fell below tangible book value. So, I think that we have been active in the first quarter as well. I think that I'd mentioned in my prepared remarks that last year's buyback equated to $0.205 a share but almost all that was in the fourth quarter.

Doug Doucette

And then last one from me. Can you just give a sense of your MD headcount particularly on the ECM side relative to maybe like a year or five years ago?

Joe Jolson

Do you mean in terms of people who come to work every day and all they do is call for ECM business?

Doug Doucette

Yes.

Joe Jolson

Now we're really structured in industry groups, in investment banking and -- the people -- the product people in our ECM side cover those industry groups but they're not segregated out. So, we have two MDs in the ECM business and one more on the kind of healthcare's dedicated side. So, maybe a total of three.

Operator

And we have no additional questions, so I'd like to turn the conference back to presenters for any closing remarks.

Joe Jolson

I appreciate your interest and look forward to chatting over the next few months. Thank you.

Operator

Thank you ladies and gentlemen, that does conclude today's conference call. Your may now disconnect your lines.

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