Cohen & Company Inc.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good morning, ladies and gentlemen and welcome to the Institutional Financial Markets’ Third Quarter 2014 Earnings Call. My name is Jenifer and I’ll be your operator for today. Before we begin, IFMI would like to remind everyone that some of the statements the Company makes during the call may contain forward looking statements under applicable security 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. IFMI 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. Please note also that the Company’s earnings release from the third quarter 2014, the non-GAAP measures of performance have been reconciled to their corresponding GAAP measures for performance. I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of IFMI.

[Lester Brafman:]

Thank you Jenifer and thank you everybody for joining us for our third quarter 2014 earnings call. With me on the call is Joe Pooler, our CFO. During the quarter, we continued to make important progress on our strategic initiatives. The transaction to divest of our European operations, which we announced in August, will further simplify IFMI’s business model and provide additional capital for our principal investing portfolio, which we believe will enhance profitability and long term shareholder value. Moving to operating results of the European operations to be sold from reported numbers results in improved adjusted operating income of $1.9 million and $6.2 million for the three and nine months ended September 30, 2014 respectively. Given the headwinds that are faced in fixed income markets, and they continue to be challenging, we remain focused on rationalizing our expense base. Importantly, we have continued to pay a quarterly dividend, reflecting our continued commitment to returning value to our shareholders. During the third quarter, the Company continued to deploy available capital into our non-sponsored investment vehicles, primarily CLO equity positions, utilizing our expertise in structured credit and leveraged finance. As of September 30, 2014, the Company's entire principal investment portfolio had an aggregate fair value of $30.1 million, including investments in ten CLOs with an aggregate fair value of $23.1 million. We hope to grow the principal investing portfolio to $35 million in the coming quarters. We continue to work diligently to reposition the Company for future success and [indiscernible] generating nice returns and increasing value for our shareholders. Importantly, our Board continues to return value to our stock holders through a $0.02 dividend for the quarter. As always, in a special account for these challenging markets we will carefully review our dividend policy on a quarterly basis. Now Joe will walk through some of the previous financial highlights in more detail.

[Joe Pooler:]

Thank you, Lester. Our reported adjusted operating loss was $100,000 for the quarter ended September 30, 2014 as compared to adjusted operating income of $2 million for the quarter ended June 30, 2014 and adjusted operating loss of $600,000 for the prior year quarter end. As Lester mentioned, adjusting the third quarter of '14 for the pending year European transaction would result in adjusted operating income of $1.9 million in the current quarter. Our net trading revenue came in at $6.3 million in the current quarter, down $300,000 from the second quarter of $14 and down $1.5 million from the third quarter of the prior year. Our trading revenue dropped from second quarter was less than 5%, which was somewhat favorable considering the third quarter generally includes the slower month of July and August and our drop off from 2Q has historically been much more severe. For example, in '13 our trading revenue dropped 33% from 2Q to 3Q. The prior quarter decrease was primarily due to less trading revenue from our investment grade corporate group following a lower summer month, while the decrease from the prior year was primarily driven by the restructuring and consolidation of IFMI symmetric trading operation in the second half of '13, which included the elimination of certain asset classes and a significant reduction in the number of revenues producers from the prior year period. New issuant [indiscernible] advisory revenue was $300,000 in the quarter, which was down from both the prior and prior year quarters. The decrease was primarily due to its SPAC transaction fees received in the second quarter of '14 and the third quarter of '13. Our asset management revenue was down $500,000 to $2.7 million in the third quarter from second quarter and was down $1.7 million compared to the year ago quarter. The prior quarter decrease was primarily the result of incentive fees in our Europe separate account business that were received in the second quarter of '14 as well as the success for option call redemption of one of the Company's managed CDOs during the second quarter of '14, which resulted in lower management fees for the third quarter of 14. The decrease from the prior year quarter was primarily due to the sale of the Star Asia entities early in the first quarter of '14 which included Star Asia management and also fees from several CDOs in the third quarter of '13, where IFMI is no longer the manager, including a onetime final fee of $500,000 related to one of IFMI's ABS CDOs back in the third quarter of '13. Third quarter '14 principal transaction revenue was $700,000, which compared unfavorably to both the prior and the year ago quarters. The decrease from prior quarter was primarily the result of negative revenue related to the Company's investment in Chip Tree [ph] as well as other legacy investments partially offset by gains related to the Company’s investment in Europe and Kenya and our growing CLO portfolio. The decrease from the prior year period was primarily the result of the sales of Star Asia entities in the first quarter of '14, which eliminated a significant source of volatility in IFMI’s financial results. The supposed loss is related to our investments in Chip Tree [ph] and other legacy investments. Compensation and benefits expense for the third quarter of '14 at $6.6 million, a decrease of $1 million or 13% from the second quarter of '14 and decreased $4.9 million or 43% from the third quarter of '13. Compensation as a percentage of revenue was 63% in the third quarter of '14 compared to 53% in the second quarter and 54% in the year ago quarter. The number of IFMI employees decreased to 118 at September 30, 2014 from 148 at December 31, '13 reductions of 20%. Our total non compensation operating expenses, excluding depreciation and amortization and any impairment of goodwill was 4.3 million for the third quarter, a decrease of $700,000 or 13% from the third quarter of '14 -- from the second quarter of '14 and a decrease of $3.1 million or 42% from the third quarter of '13. The decline has occurred across line items in both the prior quarter and year ago quarter comparison. We continue to be diligent about managing expenses. Based on our current level of operating activity we think $4.5 million per quarter is a reasonable range for our non compensation operating expenses, which should drop to about $3.5 million once the European transaction is completed. In terms of our balance sheet, as of September 30 our stock holders’ equity was $53.3 million and we have $32 million of equity capital invested in our net trading portfolio and $30.1 million invested in our principal investing portfolio. The investments at fair value line items represents our principal investing portfolio and includes or recent investments in CLO positions. The $30.1 million fair value includes $23.1 million of CLO investment. At the end of the quarter our consolidated corporate indebtedness was carried at $27.6 million and we had $7.2 million of unrestricted cash balances. We believe that the unrestricted cash balances combined with the capital invested in our net trading and principal investing portfolios is sufficient to fund our near term business model. As Lester noted, we’ve announced a $0.02 dividend for the quarter and we’ll continue to review the dividend policy on a quarterly basis. The dividend is payable on November 28 to stockholders of record on November 14. We expect to file our 10-Q no later than Monday, November 3. Finally on October 29th, the special committee of our Board of Directors elected to end the go shop period related to depending European transaction. Under the terms of the purchase agreement, IFMI had the right to initiate [indiscernible] facilitate and encourage alternative acquisition proposals from third parties for a period of up to 90 days from the signing of the purchase agreement. The go shop period did not result in IFMI receiving a superior proposal from a third party and IFMI intends to pursue the transaction with C&Co Europe Acquisition LLC, which is expected to close in the first quarter of 2015. Please direct any investor questions to my attention. My contact information is at the bottom of our earnings release. With that, I will turn it back over to Lester for closing remarks.

[Lester Brafman:]

Thanks Joe. As we approach the end of the year, I would like to take this opportunity to thank our employees and our board members for their continued hard work and support. We are encouraged our by our prospects for value creation as we continue to transition to more simplified and stable platform and looking forward to opportunities in 2015.

[End of Q&A:]

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.