Jefferies Group Earnings Call Insights: Fixed Income Trading and Deal Activity
Jefferies Group, Inc. (NYSE:JEF) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Fixed Income Trading
Douglas Sipkin – Susquehanna Financial: Just had a couple of questions. First, drilling down into the fixed income trading, obviously, it’s been very impressive for you guys. I mean, how much of this is, QE3 and activity versus, I mean, I guess are you guys feeling the competitive dynamic getting a little bit easier with some of the larger firms particularly abroad announcing significant reductions in staff or is it predominantly driven by just sort of the favorable tailwind of QE3?
Richard B. Handler – Chairman and Chief Executive Officer: I think we’re gaining real market share from a competitive position, that’s probably the biggest driver. If you talk to our clients as we do, and we go around we are being very proactive in terms of using our relationships to provide liquidity through them, our capitals provide liquidity for our primary relationships and those relationships are growing and our competitive position is very strong. So, across the products within fixed income I think we are gaining market share, the fact that the Fed is cooperating is added gravy, but I think that’s the priority.
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Douglas Sipkin – Susquehanna Financial: Second question. I am just – for some of us, that cover you guys for a while and I am just trying to engage, are you guys going to provide sort of anymore sort of I guess functionality and clarity around Leucadia and some of their legacy businesses to sort of help us understand the consolidated entity moving forward, obviously Jefferies is going to be a big piece of Leucadia. But I am just curious is there or we sort of, we are just sort of (waving) it from here now trying to figure out some of the other businesses that going to be part of the consolidated company once the transaction closes?
Richard B. Handler – Chairman and Chief Executive Officer: I mean as you can imagine we haven’t really had a whole lot of time to brief you between our year-end the merger and all that we have going on. I think as we get closer to the merger we will communicate what our plan will be going forward. I think that we are generally transparent in how we operate, but we have to come up with the plan in terms of how (these deals are) going forward.
Douglas Sipkin – Susquehanna Financial: And then last question maybe a little bit just item-wise, I mean, I guess the charitable contribution show up in comp?
Peregrine C. Broadbent – Chief Financial Officer and Executive Vice President: The charitable contribution showed up in our non-compensation expenses in the other expense line.
Douglas Sipkin – Susquehanna Financial: So, then I guess my – I am just trying to engage. I mean obviously a great bounce back year for revenues, very solid fourth quarter you guys have sort of benefited from smarter investment in Knight Capital. I am just trying to engage, what sort of revenue level can we expect maybe where we can actually start to see a little more operating leverage, it’s clearly you guys have tremendous revenue momentum, I think the next step is sort of showing a little bit more margin leverage and can we define that by a revenue level or is that sort of something that just has to happen over time?
Richard B. Handler – Chairman and Chief Executive Officer: I think the answer is it has to happen. If you listen to a couple of different things that we noted, I won’t say that there were one time things in our comp expense, but it was a year where a combination of initiatives from the past several years were still being invested in. Secondly, there are businesses that cyclically or otherwise didn’t perform necessarily up just now, so there is a little bit of netting cost of that. We noted the fact that in strengthening our platform, there was above trend severance in 2012. I think when we look out to 2013 and beyond, we see both the potential for continued growth on the revenue side and we see some subsiding of some of the investment cost and some of the one-time items. So, naturally, the compensation can begin to come down. So, we think it will be virtuous on both sides. Obviously, markets have to cooperate. The environment has to be right, but we see it as now a trend in our favor and market pressures frankly help us.
Christopher Kotowski – Oppenheimer: I was wondering in looking at (Dealogic) M&A data. We saw industry-wide, you see a pickup in announced transaction volume in the fourth quarter not so much enclosed yet, but is it your judgment. I guess Brian in particular, do you think that that is relating to transaction is trying to get in in front of year-end or do we really see a turn in activity?
Brian P. Friedman – Executive Committee Chairman and President (Jefferies Capital Partners): I think there is a turn. I would probably flip it on its head and say that in the second half of 2012 the, it’s always difficult to say what the (factors) are, but I think that the. The weight of the U.S. election and the U.S. fiscal cliff and all the macros in the U.S. coupled with EU uncertainty and coupled with maybe some growth uncertainty coming out of Asia just caused people to pause, slowdown a little bit. We saw the strategic dialog pick up over the last few months. December is stronger than the last couple of months partly I think it’s I’m not sure it’s taxes as much as the fact that just a lot of deals happen in December more than typical happen in October and November. But looking into next year the first quarter looks better than the fourth quarter and just my personal gut says that the second quarter could already be a very strong M&A period. It does just feel like it’s picking up and if we get some good some resolution on the U.S. deficit issue. We probably see a very solid 2013 M&A again you are just get a personal feeling although its informed a little bit by the dialog and the flow that we see.
Christopher Kotowski – Oppenheimer: Looking forward the current quarter $84 million in the revenues was actually your lowest since early 2010, no read through on that or is that the pause that you were talking about earlier in the year?
Richard B. Handler – Chairman and Chief Executive Officer: I think that’s just the pause I mean, if you go back to the first quarter of 2009 was as dead as I have ever seen going back to like 1980-81 when interest rates went to 25% I think our M&A revenue in the first quarter of ’09 was like $30 million. So, this is in my view just a cyclical slowdown, but cyclical in a very short sense, meaning it’s second half petered out and you saw that in the fourth quarter revenue number. I frankly can’t get it precise in my mind in terms of how the first quarter is shaping up relative to what, but when I look out particularly to the second quarter I can feel the momentum in the flow and those are the deals that will be announced this week next month and of course it’s kind of like our deal announced on November 12 is going to close somewhere between February and March. So, you are starting to see the announcements and I think you are going to see those closings. Again, our being a February quarter rather than a March quarter, I’m going to hedge a little on our first quarter, but I think as you get into the calendar first quarter, you get into March, April, May you are going to start to see a stronger flow of closings.
Christopher Kotowski – Oppenheimer: Then I guess just a follow-up on Doug’s comments. Since Jefferies shareholders are soon going to be Leucadia shareholders it would be great to get an articulation of the strategy. I mean, are you going to – is Leucadia going to be a merchant bank or is it a conglomerate? I’m curious if you are planning on holding conference call to discuss the whole of Leucadia results or are we just going to be looking just at Jefferies?
Richard B. Handler – Chairman and Chief Executive Officer: All fair questions, Chris. I think our posture right now is that we filed a proxy statement about 10, 12, 14 days ago. We’re in that process now, it’s really not appropriate for us to comment further as the merger closes and after all those are fair questions which we will be answering and we’re mindful of.
A Closer Look: Jefferies Group Earnings Cheat Sheet>>