Cowen Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Cowen Group (COWN)

Q2 2012 Earnings Call

August 03, 2012 9:00 am ET


Peter Anthony Cohen - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Operating Committee

Jeffrey Marc Solomon - Chief Operating Officer, Head of Investment Banking, Director, Member of Executive Committee, Member of Operating Committee and Chief Executive Officer of Cowen & Company

Stephen A. Lasota - Chief Financial Officer, Principal Accounting Ofifcer and Member of Operating Committee


Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Devin Ryan - Sandler O'Neill + Partners, L.P., Research Division



Good morning, ladies and gentlemen, and thank you for joining the Cowen Group, Incorporated Conference Call to discuss the financial results for the 2012 second quarter. By now, you should have received a copy of the company's earnings release, which can be accessed at the Cowen Group Incorporated website at

Before we begin, the company has asked me to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to risks and uncertainties described in the company's earnings release and other filings with the SEC. Cowen Group, Incorporated has no obligation to update the information presented on the call. A more complete description of these and other risks and uncertainties and assumptions is included in the company's filings with the SEC, which are available on the company's website and on the SEC website at

Also on today's call, our speakers will reference certain non-GAAP financial measures, which the company believes will provide useful information for investors. Reconciliation of these measures to GAAP in consistent with the company's reconciliation was presented in today's earnings release.

Now I would now like to turn the call over to Mr. Peter Cohen, Chairman and Chief Executive Officer. Please proceed.

Peter Anthony Cohen

Thank you, operator, good morning, everyone. And welcome to Cowen's Second Quarter Earnings Call. I'm joined here in our office by Jeff Solomon, COO of Cowen and Company; Steve Lasota, CFO of Cowen Group; John Holmes, our CAO. I'll start with a general overview of our performance for the quarter followed by an overview of our alternative investment business. Later on the call, Jeff will provide an update on our investment banking business, and Steve will take you through some of the details for our second quarter financials.

There's no question that the second quarter was a challenging one, based on the market environment we are operating in. I don't have to tell all of you that just the continued uncertainty around what's going on in this country, the election, the Eurozone problems, the fears of slowdown in Asia, will all weight on the quarter and on the markets during the quarter. So it was kind of a volatile quarter in equities and global credit, notwithstanding, I think, that we feel pretty good about how we did in the quarter.

Investment income were down in the first -- in the second quarter from the first quarter, but our core operating revenues remain consistent despite the environment. And here's a snapshot of our numbers. During the quarter, we reported a GAAP net loss of $8 million, or $0.07 a share, as compared to net income of $20 million, or $0.26 per share, in the prior year period. GAAP net income in the second quarter of 2011, however, included a $22 million bargain purchase gain related to the LaBranche acquisition and an $18 million deferred tax benefit associated with the company's acquisition of Luxembourg captive reinsurance company. So when you put those together, there was $40 million that went through GAAP income last year, GAAP revenue, that was absent this year. So on an operating -- pure operating basis, our numbers in the second quarter this year is substantially better than last year.

On an economic income basis, we reported a loss of $6 million in the second quarter compared to a gain of $600,000 in the prior year period. Again, our performance in the prior year period included an $18 million benefit associated with the acquisition of the Luxembourg reinsurance company, which is reflected in our investment income revenues. So when you compare economic income, which includes the Lux income but not the gain on LaBranche bargain purchase, the numbers again are better in the second quarter from the core operating businesses. Excluding noncash items recorded an economic income cash gain of $2 million in the quarter compared to a $7 million gain in the prior year period, and again I just referenced the $18 million on the Lux captive that was in last year's numbers, not in these year's numbers, so again a good comparison.

For the first half of the year, we reported economic income loss of approximately $100,000 and cash-based economic gains of nearly $15 million. In the 2011 first half, we recorded economic income of $8 million, a cash-based gain of $19 million. And there again if you back out Lux, we'll see that it was a very positive operating comparison.

In terms of cores, our second quarter non-comp expenses were $8.4 million below run rate levels, which we measure as our -- against fourth quarter of 2011, so we can track our pretax expense reduction cost levels. Compared to 2011, our expenses for the first half of the year have declined by 14%, including a 4% drop in fixed expenses. And while there was a slight increase in expenses from the first quarter, which were partially due to the new expenses related to the ATM acquisition, which we made very early April, we are still on track to achieve the expense savings objectives that we've set in 2012. And in fact, we're continuing to identify opportunities to save expenses without impairing or impacting what we view are revenue opportunities. And we remain very committed to further controlling our expense base. With our shares rating and the discount to tangible book, we saw an opportunity to repurchase shares pursuant to the authorization, which was announced last fall, $20 million. We have acquired 5.4 million shares in the open market for approximately $16 million. We've also purchased an additional 2 million shares as a result of net shares settlement relating to vesting of equity awards. As an additional commitment to enhancing shareholder value, yesterday our board approved restoration of $15 million to the buyback program, so that now we're starting off this quarter with $19 million to spend on buying back stock, and we'll assess and go back to our board as required or as necessary if we fulfill that, the use of that $19 million, and we see further opportunities to buy stock below book value.

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