KBW, Inc. (KBW)

Q2 2010 Earnings Conference Call

July 29, 2010 9:00 AM ET


Alan Oshiki – IR

John Duffy – Chairman and CEO

Robert Giambrone – CFO


Patrick Davitt – Bank of America/Merrill Lynch

Hugh Miller – Sidoti

Steve Stelmach – FBR Capital Markets



Good day, ladies and gentlemen and welcome to the Second Quarter 2010 KBW Earnings Conference Call. My name is (Keisha) and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the call over to, Mr. Alan Oshiki, KBW Investor Relations. Please proceed.

Alan Oshiki

Thank you operator and good morning, everyone. Joining us on the call this morning are John Duffy, Chairman and Chief Executive Officer of KBW; and Robert Giambrone, the company’s Chief Financial Officer.

Before we start, I want to briefly remind everyone that some of the statements made during this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws, including such statements as those regarding expectations of future results, general financial performance, future business prospects and strategies.

These statements are based on management’s current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned not to place undue reliance on these statements.

Additional information about factors that could cause our results to differ materially from those in the forward-looking statements can be found in the company’s filings with the U.S. Securities and Exchange Commission.

At this time, I would like to turn the call over to Mr. John Duffy. John?

John Duffy

Thank you Alan. Good morning everyone and thank you for dialing in to this morning’s call. As is described in the press release this morning, our first half revenues were $239 million up 35% from last year. Revenues for the second quarter were basically flat with last year’s second quarter.

Our second quarter 2010 revenues were down from the first quarter and generally that reflects the slowdown and unfavorable markets that I think we experienced in May or June of this year. In summary, in terms of our business lines, our equity capital markets activities were still very busy, but I would say that transactions were more difficult to complete in the second as opposed to earlier in the year. Again because of market conditions.

M&A in terms of our investment banking activities, I would still characterize as quite. Investment banking revenues in total were $131 million for the first half. In terms of our commission business, cash equities business generally the revenue levels were flat compared with the prior year and the second quarter with very comparable for the first quarter. I think our performance display has been better than most of the firms that we would consider our peers and again that’s the flat performance I think is a function of difficult operating environment.

The trading environment clearly in the second quarter was more difficult than the first quarter and we experienced that in both the fixed income and equity areas and also some marks in terms of some of our principal investments. As we mentioned previously we’ve expanded into Asia. We now have one quarter of performance behind us. I would say that we’re very pleased with the progress that we made in our Hong Kong and Tokyo’s office and look forward to expanding that presence.

On the expense line, we kept the compensation expense level at 59.5% of revenues in the second quarter, that was exactly the same number in the first quarter, that percentage excludes the IPO awards that relates to a escrowing public back in November of 2006 and (inaudible) in the fourth quarter of this year.

As I suggested back in February in our fall some of our growth initiatives like the Asia expansion were probably cause our compensation ratio to be 1% to 2% above what it probably would have otherwise been because of the build out of those businesses. Two other items mentioned in our press release that is really new. One we have decided to institute a quarterly cash dividend, the initial payment will be $0.05 per share and I believe the payable date on that dividend is September 15, and the Board also authorized a share repurchase up to $70 million. I think explaining both of those actions in 3.5 years since we’ve gone public; we feel today we have more than enough capital to run our businesses.

We haven’t done any acquisitions since we’ve been public despite some of our expansion moves we frankly have found a cheaper or more efficient to recruit people of rather buying other firms. And we look at the initiation of a cash dividend as partial distribution of our earnings power. The share repurchase movement or the authorization, we decided to take stock as part of our compensation in 2006 and as those shares vest, we’re conscious about the potential diluted impact of those shares, and hence we’ve given ourselves the ability to retire those shares and we think that’s the right move.

Still excited about the opportunities to grow our business and we don’t think that either of these moves or actions the cash dividend or the potential repurchase of shares will impede our ability to take advantage of these growth opportunities that we see in it any way.

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