Raymond James Financial, Inc. (RJF) Earnings Call Transcript & Summary

Good morning, everyone. I'm Kristie Waugh, Head of Investor Relations at Raymond James Financial. We appreciate you joining us today. Presenting this morning are Paul Reilly, Chairman and Chief Executive Officer; and Paul Shoukry, Chief Financial Officer. Before they begin, please note, certain statements made during this presentation may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory environment -- or regulatory developments or general economic conditions. In addition, words such as believes, expects, could and would as well as any other statements that necessarily depend on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements, and we urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q, which are available on our Investor Relations website. During today's remarks, we will also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedules accompanying our presentation. With that, I would like to turn it over to Paul Reilly, Chairman and CEO of Raymond James Financial.

Thanks, Kristie. First, welcome to our 41st Annual Institutional Investor Conference, one of the few things that's actually older than Jeff Julien, who's only been CFO for 33 years, I think, before he stepped down. So I'm glad Jeff joined us today. And Paul, who is the -- succeeded him will be speaking right after I do. I'm going to give a quick overview, and Paul is going to really cover some of the numbers. And again, I think the fundamental focus of Raymond James hasn't changed since Bob James started it and Tom really grew and institutionalized the business. And for those of you that aren't Raymond James people, Tom does come into the office every day, too, and it's actually an asset to talk to someone with his wisdom, especially in times like this between election cycles, interest rate outlooks, economic, coronavirus. Times of uncertainty have always played into our core values, one which is conservatism, and that times like these, the liquidity in capital that it looks like at the end of long cycles, we usually get criticized for having them and then downturns, if this is a downturn, we can put to use and certainly, weather the storm where other firms often have trouble with that. We set out 10 years ago to set this goal as being the premier alternative to Wall Street, not negative to Wall Street, but saying, we want to be that small, feeling regional firm -- family-feeling firm, yet have all the capabilities to compete with the wirehouses. And I believe today, we are there. We continue the last 2 years to be the largest net recruiter in the industry. Our recruiting pipeline stays very, very strong. And I believe it has to do with our environment and having the technology and services that advisers can get at larger firms. Our business is diverse, but 2/3 of our revenue is really Private Client Group. But if you took mortgages and SBLs at the bank and the assets that we manage for Asset Management for our clients internally, almost 80% of our revenues are Private Client Group-driven. So it is the driver and really the focus of the firm, yet all the businesses help that. I mean if it wasn't for the SBLs and mortgages, it would be hard to recruit people. If it wasn't for the research and offerings in Capital Markets, both in Fixed Income and in Equity Capital Markets, it would be harder to recruit people. If it wasn't for the Asset Management platforms, it's the same. So our businesses do help each other and very focused, and each on their own, as shown by the vitality of this conference, succeed. We've been a growth firm. We've continued to grow. In fact, you'll see a chart in a while because profitable growth allows us to continue our investments in people, businesses and technology that helps us to expand our offering. So that organic growth, which has been unusual in our industry, if you look at all the large firms, they actually shrank in terms of number of advisers. That organic growth is important to us to continue our strategic plan. Over the last 9 years, we've had 11.5% compounded revenue growth, yet on the top -- on the bottom line, 16% compounded annual growth. So certainly helped by interest rates for a couple of those years, but steady increase in growth despite, in the last 3 years, we've made significant investments in our infrastructure, both our risk management, compliance supervision, but also our systems, our finance department, our HR department. And over the last 4 years, we've invested in infrastructure, which we believe will be good leverage going forward. We've had 128 consecutive quarters of profitability, again, keeping in tune with our long-term focus. We used to go back all the way to the Black Monday quarter, but we've outgrown that, too. The only quarter that we lost money was in the market correction in 1987, where we lost $100,000 since being public. Again, our focus on investment in technology, operations and infrastructure, I believe, has really paid off. The firm's triple the size it was 10 years ago, where we're now in the S&P -- almost in the Fortune 400 and the S&P -- I'm sorry, the Fortune 400 and the -- why am I drawing a blank? S&P 500. We continue to grow. Our debt credit rating is the same as Goldman Sachs, Morgan Stanley and Bank of America. So we've really grown on a solid basis. Focused on people. We continue to retain people, both inside the office and our -- more importantly, our advisers who we serve, both in Equity Capital Markets and Private Client Group. But we know the environment is changing. We've just spent an off-site talking about the changes. You see the big transactions that's happened, whether it was the E*TRADE acquisition or the Schwab acquisition, you can see the -- all the things happening in the market. People are trying to get into our marketplace. There are a lot of technology companies coming in. But we still believe in the position of advice. And going forward, we believe advice is essential, that what we do for our clients -- and more importantly, we make this the best place for our advisers. We still are betting on advice and our advisers long term, going across our digital platforms. So for example, today, we have the only application -- only firm where a financial adviser can do everything on their iPhone that they can do on their desktop. And our Private Client Group advisers can even dictate the notes and it goes into CRM. We're rolling that technology out to their clients and our retail app. So that digital innovation is going to also transform us and lead us forward. Capital. I always -- the big joke was people would say we're overcapitalized. And I would tell them, when we have too much capital, I'll let you know. We do have excess capital today. Mainly that we were looking at acquisitions over the last couple of years and frankly, they were just -- the prices didn't make sense to us. So we're not going to do something just to be bigger. We've made a commitment to buy stock, to buy dilution back now on a more mechanical basis and continue to buy back even more aggressively where we get into opportunistic times. But we're still -- even with that, we'll be extremely well capitalized. And that's the focus on our long-term value. So hopefully, what we're experiencing right now is a blip. If it's longer term, I think it really plays to our advantage, our capital position and the ability to be flexible and do things in any kind of significant downturn. With that, I'll turn it over to Paul.

Thanks, Paul. You guys know that I trust Paul when I'm willing to share a clicker with him this week. So I'll spend the first couple of slides bringing everyone up to speed on our results for the first quarter of fiscal 2020. And then I'll zoom out a bit and provide a bit more historical context because as you all know, we're much more focused on our long-term results than we are our results from quarter to quarter. As for the first quarter, our results were pretty solid, especially considering the 3 short-term rate cuts since August of 2019. Just to put that into context, those 3 rate cuts have a negative impact to our revenues and pretax earnings. We're estimating about $140 million on an annualized basis. So despite that headwind coming into the year, we were able to generate revenues -- net revenues of $2 billion, which was our second best-quarter preceding just the quarter prior -- the record set in the quarter prior. And the reason it was down sequentially a bit was primarily due to investment banking revenues and tax credit funds revenues, which always seem to have a very strong fourth quarter in each fiscal year. It was still up 4% on a year-over-year basis, primarily driven by growth in the Private Client Group business. And particularly, assets and fee-based accounts continue to grow. Earnings, both earnings and earnings per share on a GAAP basis, both were at records, up 8% and 12%, respectively, on a year-over-year basis. Now they were down sequentially compared to the adjusted results in the preceding quarter. The preceding quarter had an accounting charge of goodwill impairment of $19 million and so it was down sequentially. But again, good revenues and good earnings, particularly given the headwinds from lower rates and a relatively soft quarter for investment banking revenues. Return on equity is 16% on an annualized basis. And return on tangible common equity, which is not a metric we love but we started disclosing this quarter because it's become sort of a standard in the industry, most of our peers are talking about it, it was 17.5% on an annualized basis. We think that's good on both a relative and absolute basis, especially given the strong capital position that we have. Just to put that into context, some of the largest firms in our industry recently announced new targets to get to 13% to 15% over the next several years. So to be at 17.5% on our capital position is, we think, an attractive result. Just as important and impressive as our financial results are the growth in our key business drivers across our businesses. Most of them, as you can see, ended the quarter at record levels. So for example, client assets under administration of almost $900 billion, that was up 24% on a year-over-year basis. Now we definitely had help from equity markets over that period. But if you look at the average in our industry of the peers that we monitor, it was more like 18% to 19%. So 500 basis points of outperformance in our asset growth represents significant market share gains in our biggest business, which is the Private Client Group business. And you can see that in the financial adviser count as well. 8,060 financial advisers in the Private Client Group business, up 3% year-over-year. Most of the big firms -- almost all of the big firms were down on a year-over-year basis. And again, that's a testament to what Paul was talking about in terms of having the combination of a culture that's client- and adviser-focused, which is becoming increasingly rare in our industry, coupled with the scale and scope of services that advisers, particularly at the wirehouses where we recruit the vast majority of our advisers, have become accustomed to. The one metric on this slide that did not reach a record was client cash balances, although it was up 5% sequentially. It was down from the prior year's December quarter. You may recall, December 2018, before the Fed pivoted its stance, there was a lot of market volatility, which caused a surge in cash balances. After the Fed came in and calmed down the markets, those cash balances were pretty rapidly redeployed into the market and also used for tax payments in the first calendar quarter. So the cash balances have stabilized. I would tell you, it's too early to tell now because we've only had a week or so of volatility. But typically, with elevated levels of market volatility, if this continues to persist, we would expect cash balances to increase from here as well. This is where we start zooming out and looking at a little bit more historical context. As you see, our revenues finished the year at $7.7 billion. Importantly, about 75% of those revenues are asset-based. So that provides relatively good stability and predictability in our revenue base. Most of the acquisitions in our industry that Paul was talking about is really firms trying to increase their exposure to asset-based revenues. Fortunately, that's where we already are, given Private Client Group is our biggest business. And that revenue growth of the 5-year period of 10%, very attractive if you look across our industry during this period. And then earnings growth, both on a GAAP and non-GAAP basis, earnings per share growing at around 17% per year over this 5-year period. So we have generated operating leverage during this period, and that's notwithstanding the heavy level of infrastructure investment that we've made over the last 3 years that Paul mentioned. And both our risk supervision compliance and a lot of our support functions, we're still able to generate operating leverage. Now with that being said, even before this recent scare, the focus has been on reining in that expense growth. We're fortunately at the later stages of building out our infrastructure. We don't expect the -- even, again, before the last couple of weeks, this is really the last 12 to 18 months, we didn't expect the equity markets and/or the interest rates to be as conducive as they were over the last 5 years, and so we've been focused on reining in expense growth and that'll continue to be the focus going forward, with the caveat of we still want to invest in growth in our businesses. That's the biggest difference, I think, between us and some of the larger firms that are talking about expense management is we're still a growth firm and we want to grow and continue to invest in growth in all of our businesses. Turning to the segments real quickly. Private Client Group finished '19 with record revenues and pretax earnings growth of 10% and 12% on a compound annual growth basis over the last 5 years. And that's really driven by financial advisers -- the net addition of financial advisers as they bring on their clients from their prior firms and grow assets. Assets under administration growth of 12% over the last 5 years. Notably, on the left side here on the financial adviser count, most of this growth has really come through organic recruiting and retention of our existing advisers, which is how we prefer to grow versus acquisitions. Now in 2016, we did make an acquisition of Alex. Brown from Deutsche Bank, which had about 200 financial advisers and a much smaller acquisition in Canada of 3Macs. But again, the vast majority of this growth over this period was organic recruiting. The reason we prefer organic recruiting is because those advisers are self-selecting to join Raymond James, so we believe that they're a higher likelihood of being good cultural fits and staying with the firm over the long term. Capital Markets, a little bit more mixed results here. Obviously, as you all know, inherently a more volatile business. It did generate record revenues in 2019. Pretax income of $110 million, a little bit lower if you exclude some of the adjusted items. I mentioned the goodwill impairment in the fourth quarter. We also had a $15 million loss associated with the sale of our European equity research business in the first quarter. I would add those back up for you, but that'd be a non-GAAP adjustment we didn't show and the accountants would get mad at me. So you can use your imagination, do the math. With those $34 million of adjustments, it would look like a better pretax income number for 2019. But a big picture, what I would tell you, fixed income had a very good last couple of years driven by interest rate volatility. We're the #1 platform in the depository space in fixed income and the top 10 platform in public finance. All throughout this period, investment banking revenues have grown, really driven by M&A revenues and the expansion of our depth and expertise in the investment banking space. And partially offsetting that strength and the strength in our tax credit funds business, which had a record year as well, is the challenge that you all are very well aware of, the challenges in equity sales and trading that's really impacting the entire industry, and there's a lot of structural reasons for that, as you all know. Asset Management, record revenues, record pretax, record assets under management at the end of 2019, really driven mostly over this period by the growth in our Private Client Group business and the increased utilization of fee-based accounts. Carillon Tower Advisers is our more traditional asset manager, about $60 billion of the $150-or-so billion of assets under management. Good performance on average across the product lines. We've made some investments over this period to diversify and strengthen this product line. But that area has been negatively impacted by the industry-wide shift from actively managed product to passive products. So as we look at making acquisitions in this space going forward, we're going to have a bias towards products -- investing in products that are more difficult to index. The bank, I see Steve Raney in the audience, record revenues, record pretax income of 19% and 16%, respectively. Actually, the pretax income would look better but we made an adjustment to an internal allocation in fiscal 2019. Very good performance driven by consistent loan growth. You see the loans finished the year at record levels, up 14% on a compound annual basis over this 5-year period. And I'll tell you, what's changed most over this 5-year period is that the loan portfolio has become much more diversified, and particularly the last couple of years, with a much greater focus on loans to our Private Client Group clients, both securities-based loans and residential mortgages, which, in addition to the benefit of strengthening the relationships between our advisers and their clients, also generates good risk-adjusted returns. At the same time, we've seen a pretty substantial deceleration of corporate loan growth at the bank as the market has become extremely competitive. Spreads have tightened quite a bit, covenants have become an endangered species. And so we've, not being a traditional bank, have the fortunate ability to stay opportunistic and disciplined with our loan growth across all of our portfolios. The last slide I'll speak to before opening the floor to questions is capital management. Paul mentioned that we're more focused on returning capital to our shareholders. Well, we actually have been more focused as well. If you look at the last 5 quarters, we returned about $1 billion -- over $1 billion of capital to our shareholders through dividends and share repurchases. And again, the repurchases were somewhere in the mid-70s in term -- on average for the fiscal year. On the call a couple of weeks ago, we said we're going to offset dilution of about $200 million a year in a more mechanical basis, and we're going to be opportunistic at a price below 1.8x book, which just a week ago seemed like a stretch, but we're in that territory now. So with that, I will open it up for questions for either one of the Pauls up here. Any questions? And then we also have a breakout after this for those of you that are afraid to ask questions in a public setting.

A lot of discussions about artificial intelligence. Is Raymond James thinking about what AI might mean for the different segments?

So I'll repeat your question and hand it over to Paul because he's more intelligent than I am. It's a question around artificial intelligence and the impact to our business.

I think Paul is trying to say I embody artificial intelligence. But the -- we're using it in our segments. So as simple as robotics to simplify processes, all the way to mine the databases, we -- part of our transition around 8 years ago in upgrading our technology was to get a central true source of data. Most firms struggle with this. That all -- in order to use artificial intelligence, you have to be analyzing really data -- real data. And so we have now a data layer, which has true data in it. We have someone that owns it to make sure the definition. We're starting to use it for advisers -- to give advisers recommendations that say "This bond's coming due. Here are some opportunities," to let them know patterns with their client behavior. We're still at the early days because we've just started it in the last year with our data scientists, but we plan on using it to help our advisers look ahead to trends and opportunities in their client base. And true to Raymond James, we let them make the decision. They're their clients, but we want to alert them in advance that this is coming. Any others? Well, great. We appreciate everyone making the trip, and we know, which is in times where you wonder if you should travel, but thank you all for coming, and we'll see you later.