Cohen & Company Inc.
Q1 2024 Earnings Call Transcript

Published: 6 May 2024

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Cohen & Company's First Quarter 2024 Earnings Call.

[My name is Maria, and I will be your operator for today. Before we begin, Cohen & Company would like to remind everyone that some of the statements the company makes during this call may contain forward-looking statements under applicable securities laws. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in such forward-looking statements.:]

[The forward-looking statements made during this call are made only as of the date of this call, and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances. Cohen & Company advises you to read the cautionary note regarding forward-looking statements in its earnings release and in its most recent annual report on Form 10-K filed with the SEC.:]

[Earlier today, Cohen & Company issued a press release announcing its first quarter 2024 financial results. Today's discussion is complementary to that press release, which is available on the company's website at cohenandcompany.com.:]

[This conference call is being recorded, and a replay of it will be available for 3 days beginning shortly after the conclusion of this call. The company's remarks also include certain non-GAAP financial measures that management believes are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in the company's earnings release.:]

[After the prepared remarks, the call will be open for questions. I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of Cohen & Company. Please go ahead.:]

[Lester Brafman:]

Thank you, Maria, and thank you, everyone, for joining us on our first quarter 2024 earnings call. With me on the call is Joe Pooler, our CFO. Look, we are pleased to report that our second consecutive quarter of strong earnings with a quarter adjusted pretax income of $7.7 million and earnings per share of $1.28. 2024 is really off to a great start. Coupled with our strong fourth quarter, we have now generated over $24 million of adjusted pretax income and $4.25 of earnings per share in the last 6 months, which is actually 65% of our current share trading price.

[Despite the challenging market environment, we continue to invest in our full-service boutique investment banking operation, Cohen & Company, which we call CC or referred to as CCM. During the past 2 years, we have repositioned the firm with a focus on CCM and are beginning to see our robust pipeline delivering through the income statement. We are particularly proud of the fact that over the last 12 months, CCM has been the leading adviser for all these SPACs.:]

[The CCM team has grown to 23 professionals and has developed a reputation for creatively solving capital market problems with all clients. Although deal execution and closing time lines remain extended, we have strong momentum moving forward in 2024, which you can see in our results. CCM has generated over $24 million of advisory revenue in the first quarter.:]

[In addition to the strong CCM performance, we recognized substantial income from our equity method investments in the sponsors of 6 SPACs that closed their business combinations during the quarter. This income from equity method affiliates was offset by charges in our nonconvertible, noncontrolling interest line item. Nevertheless, the net of the 2 items remained positive for the quarter.:]

[So look, we have put a lot of effort into the SPAC space over the last few years, and I'm really pleased that all this effort is starting to pay off, and we're seeing some monetization of that effort. But we don't expect the SPAC market to boom like it was in 2020 and 2021. We do feel that it is here to stay as a viable alternative for Cohen to access the public markets. The effort that we have put in has really entrenched us in that space, and we believe we will continue to maintain our leadership position going forward.:]

[So in addition to our investment banking business and capital markets, we'll also revisit our trading businesses. So that is also off to a strong start, up 26% from the first -- from fourth quarter 2023, so we're in the process of transitioning this business from a wholesale business, which is really a dealer-to-dealer business, to a middle markets business, where we serve kind of smaller institutions that are underserved by large accounts. We feel this -- there's a lot of opportunity in this space given how larger firms are looking up towards larger accounts, and a lot of the smaller boutiques are cutting back in terms of head count, leaving a large swathe of clients that are really looking for service on a professional basis.:]

[To that end, in January, we hired George Holstead as the head of our new Middle Markets Group, and we have since hired 4 additional traders and 2 salespeople into that area. We've also hired -- that was at the end of the quarter. We've also hired another one this weekend to make it 3 salespeople. As we continue to build our talented team, we anticipate that the Middle Markets Group will contribute to profitability in the coming quarters. On the asset management side, the fourth quarter was a little bit quiet, and we're hoping to have a couple of projects that we can talk about in the following quarters to come.:]

[Although our overall results were strong, we continue to experience unfavorable volatility and negative mark-to-market adjustments in our principal investing portfolio. In certain cases, we received investment banking consideration, investment assets, and those assets have subsequently fallen the value. This has contributed to the negative volatility in principal transactions. Equity value of post-business combination SPACs has continued to decline, making many of the founder shares we received and representing our income from the equity method affiliates to decrease in value, negatively impacting the equity method and the principal transaction line items.:]

[Look, there's a couple of things in this. We anticipate this, going forward, will continue until this kind of brings itself through the system, and our pipeline kind of gets back to a little bit more cash heavy -- and also, is that like -- a lot of these investments were done for services rendered. So it's not as if we've invested the capital and are losing capital on the side of these investments, which is a little bit kind of misleading in our principal transaction line.:]

[So really, when I look at our business, I look kind of looking past the volatility of our Principal Investments segment and looking more towards the long-term value we're creating in both the capital markets area of our business and investment banking and trading as well as our asset management business, which again, we'll talk about in the next quarter or 2.:]

[Look, we're excited about the overall momentum we're building and the opportunities we have to grow our top line revenue and profitability. We will continue to invest prudently in revenue generating talent and additional diversification of our offerings. Moving forward, we remain focused on enhancing stockholder value and continue to pay our quarterly dividend.:]

[Now I will turn it over to Joe to walk through this quarter's financial highlights.:]

[Joseph Pooler:]

Thank you, Lester. I will begin with a discussion of our operating results for the quarter. Our first quarter earnings follow a strong fourth quarter and represent an excellent start to fiscal '24. Our net income attributable to Cohen & Company Inc. was $2 million for the quarter or $1.28 per fully diluted share compared to net income of $4.5 million for the prior quarter or $2.97 per fully diluted share and compared to net loss of $2.6 million for the prior year quarter or $1.77 per fully diluted share. Our adjusted pretax income was $7.7 million for the quarter compared to adjusted pretax income of $16 million for the prior quarter and adjusted pretax loss of $9.6 million for the prior year quarter.

[As a reminder, adjusted pretax income is a key earnings measurement for us as it incorporates enterprise earnings attributable to our convertible noncontrolling interest which is substantially held by our Founder and Chairman, Daniel Cohen. Daniel holds his interest in the enterprise through our primary operating subsidiary, Cohen & Company LLC which is a consolidated subsidiary of Cohen & Company Inc.:]

[As Lester mentioned, we have generated in excess of $23 million of adjusted pretax income and $4.25 of earnings per share over the last 6 months. New issue and advisory revenue was $24.4 million in the first quarter, an increase of $5.7 million from the fourth quarter and $23.5 million from the year ago quarter. CCM closed 13 deals and generated all of the new issue and advisory revenue in the quarter. Net trading revenue came in at $9.8 million in the first quarter, up $2 million from the fourth quarter and $1.6 million from the first quarter of '23.:]

[The increase from both of the prior quarters was due primarily to higher trading revenue from our corporate and mortgage groups. Our asset management revenue totaled $2.7 million in the quarter, which was up $800,000 from the prior quarter and $700,000 from the prior year quarter. The increase from the prior quarters was due primarily to a deferred performance fee in one of our pride funds that was recorded in the current quarter.:]

[First quarter principal transactions and other revenue was negative $18.4 million, primarily due to mark-to-market adjustments on our principal investments related to our involvement in the SPAC market as a sponsor, asset manager, investor and adviser, which has resulted in increased holdings of public equity positions in post-business combination companies. Equity value of post-business combination SPACs has continued to decline, leading many of the founder shares we received to decrease in value, negatively impacting the principal transactions line item.:]

[In addition, in certain cases, we receive investment banking consideration from these SPAC clients in the form of investment assets and those investment assets have subsequently fallen in value. We anticipate that there will continue to be some volatility in our principal portfolio and our operating results going forward as a result of that volatility. Principal transactions include all gains and losses and income earned on our $39.3 million net investment portfolio on the balance sheet. Compensation and benefits expense for the quarter was $14.8 million, which was down from the prior quarter and up from the prior year quarter, primarily due to the fluctuations in revenue, income from equity method affiliates and net of our nonconvertible noncontrolling interest and the related impact on variable incentive compensation. The number of company employees was 116 at the end of the first quarter compared to 118 at the end of the year.:]

[Net interest expense for the quarter was $1.7 million, including $1.2 million on our 2 trust preferred debt instruments, $127,000 on our senior notes $19,000 on our credit line and $359,000 on our redeemable financial instrument. Income from equity method affiliates during the first quarter totaled $29 million, This amount included $32.7 million of income from our equity method investments in the sponsors of 6 SPACs that closed their business combinations during the quarter, which resulted in an increase in the value of the founder shares to which we are entitled to an allocation from those sponsors.:]

[During the quarter, there was also an offsetting charge of $16.7 million related to these 6 SPAC closings recorded in the net income loss attributable to the nonconvertible noncontrolling interest. These nonconvertible noncontrolling interests represent ownership in certain of our consolidated subsidiaries by the portfolio managers of our current SPAC series funds.:]

[The charge is generally an offset to the amounts we record in our net income from equity method affiliates. In terms of our balance sheet, at the end of the quarter, total equity was $113.3 million compared to $91.8 million as of December 31. The nonconvertible noncontrolling interest component of total equity was $25.9 million at the end of the quarter. And $9.6 million at the end of the year. Thus, the total enterprise equity, excluding this nonconvertible noncontrolling interest component was $87.4 million at the end of the quarter, a $5.2 million increase from the $82 million at the end of the year. At quarter end, consolidated indebtedness was carried at $29.7 million and our redeemable financial instruments were carried at $7.9 million.:]

[As Lester mentioned, we have declared a quarterly dividend of $0.25 per share payable on June 5 to stockholders of record as of May 20. The Board of Directors will continue to evaluate the dividend policy each quarter and future decisions regarding dividends may be impacted by quarterly operating results and the company's other capital needs. With that, I'll turn it back over to Lester.:]

[Lester Brafman:]

Thanks, Joe. Please direct any off-line investor questions to Joe Pooler at [phone] or via e-mail to [e-mail]. The contact information can also be found at the bottom of our earnings release. Operator, you can now open the call lines for questions, And thank you all for joining us today.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. It appears that there are no questions at this time. I would now like to turn the floor back over to Lester Brafman for closing comments.

[Lester Brafman:]

Thanks, Maria. I'm proud of our results in the first quarter, and I want to thank all our members and team members for their dedication, especially as we continue to face a challenging market environment. With strong performance over the last 2 quarters, we have great momentum across the business and are well positioned for the year ahead.

[Thanks again for enjoying the call, and have a good day.:]

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.