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

Good morning. First, welcome. First, I want to thank those who are guests for attending the conference. We wouldn't have a conference without you being here. So we appreciate it, both the presenters and investors and to the associates in the audience. I always have to show a forward-looking statement. So anything we say may or may not be true, I guess, it says on there. Give you a quick strategic overview and then Paul Shoukry, our CFO, will talk a little more in detail about the numbers. For those that you don't know me, I'm Paul Reilly. I'm the Chair and CEO of Raymond James. A little over 60 years, our company has been built on one thing, and that's around the people, and that includes focuses on our associates, our clients and our advisers, the people who serve our clients. Core values put very clearly and simply, we put clients first. That's both our clients and our advisers, we treat as clients to make sure they're getting the very best service to help their clients. A little over a decade ago, we put out a positioning statement that we wanted to be what we call the premier alternative to Wall Street, is that we were kind of this larger regional firm, and we said we wanted to keep that culture and sensitivity that place that felt like a family firm yet be able to offer anything you could get from a Wall Street firm. And today, we think we really have gotten there that we have the depth, the capabilities, which I'll talk about in a minute, that gives us that ability to do whatever a Wall Street firm can do, but also still have that family feel that Raymond James grew up and the financial capital of the world, St. Petersburg, Florida. We're a very diversified business. So you can see that our assets under administration now crossed $1 trillion last year. We have about 8,700 advisers in the U.S., Canada and the U.K. One thing we're very proud of 140 consecutive quarters of profitability. And every quarter of '09, we were profitable. It was our worst year, we had a 7.9% return on equity. In fact, on the 30 years of being public, we only had 1 negative quarter. That was the Black Monday quarter when Tom refused to turn down anything on the retail sales desk. We answered every call. In that quarter, we lost a whopping $100,000. Now a lot of firms probably would have made some kind of accounting adjustments, so they would have earned a little bit of money, but pretty conservative Raymond James. So it was a good reason to have a lost quarter. We have more than 2x the regulatory requirement to be well capitalized. So that conservative nature part of our firm because we want to be here through up cycles and down cycles. And that's why we could grow and be profitable in '09 when most firms couldn't. The strong credit ratings with our latest upgrade, we now have 3 A-level credit ratings from the rating agencies. So there's an outside source saying, not us, but they're saying how conservative and how strong our balance sheet is. And today, we're a Fortune 400 company. The great thing about our structure today is how diversified we are. And through all of our cycles, as you'll see in a minute, we've been really profitable as some businesses thrive in certain markets and others struggle a little more. Other ones seem to pick up and are countercyclical and they're all related. A lot of people said, "Why do you have so many entities in these groups." So the Private Client Group is about 70% of our reported revenue, about 80% of our total revenue. If you really look at the asset management and the loans and the bank that generates income. But those -- they're a source of deposit for our bank. And our banks lend to our clients. Our asset managers have products that our private client groups use in the capital markets, our corporate executive services and our research, all supply that. And you can see in these different cycles when we go through the years, our earnings are so steady because as some are up in certain cycles, others are down, and we've been consistently profitable and consistently growing as I'll show a minute in the slides. Our diversification shows its value, and you can see the ups and downs of how different segments have performed in different times. So we have a bad fixed income market, interest rates covered for it and then the rise in interest rates. And we have strong M&A markets, the fixed income markets were off. I mean, so you see throughout history that all of the percentages of the earnings have changed over time, the overall corporate results still show growth on the top line and the bottom line. We are a growth company. We're not a runaway growth company. We've had steady growth through all the time periods. And we believe that if you grow and you grow profitably, you can invest. Our technology investment over the last 10 years went from $100 million a year to over $700 million this year. If you can reinvest in your business and you do it well, you come up with new products and services and it fuels growth. And that growth is good for people inside the company because it gives them opportunities. It's good for investors if you can grow profitably and it's been the hallmark of the company really since the very, very beginning. Controlled growth. At times, we've been accused of having rapid growth. They'd say, well, look how fast you're growing in PCG. Well, our adviser count has been growing about 3% compounded a year. If that's rapid growth, what's medium growth? What's slow growth? It's just a lot of the industry said negative growth in adviser count. So our ability to retain advisers and to recruit advisers has given us a good steady growth. And then we've also grown with the market. 10 years of growth, 11.2% compounded over those 10 years. You can see steady growth on the top line through a lot of different market environments. And if I can get this moving. Here we go. And you can see with almost a 16% compounded growth in earnings through all these cycles. So good long-term growth projection. We manage for the long term. So any time we get in uncertain markets, yes, we are conservative. Yes, we have capital. Yes, we have excess corporate liquidity, yes, but it's paid off in the long run as we've been very, very flexible. And even in 2 very different interest rate environments or 2 very market environments, one of the few firms that really continue to have record profits over the last 2 years. So our growth initiatives are we first focus on core growth in all of our market segments. So I talked about Private Client Group and our equity capital markets business. We've added -- we've acquired firms. We continue to add resources, both M&A professionals, underwriting equities continue to grow in all of our businesses. I talked about technology. We've been given awards constantly in our Private Client Group for the best desktop in the industry. We believe we have it, the outside awards say that, but we can really tell when we recruit people because people from all the firms rave about the technology we have in our desktop. And we've just announced that same robust technology that's, we believe, again, best-in-class is now going to be rolled out in our client app. We made a strategic choice 8 years ago that we wanted the professionals to have all the information first to have the best desktop to serve their clients. Now we're going to bring that same look technology and field to the clients so they can interact directly with their advisers. And the strategic focus on M&A. We've done 6 acquisitions over the last 2 years, and we focus long term on finding those firms that we think can add to our capabilities and resources. And you can see the list in the last year, Charles Stanley, joined us, a private wealth firm in the U.K., it took 7 years to close this deal. Tells you what a bad closure I am. But they've joined us. It's a great fit. Financo joined in -- I'm sorry, that's 2001. SumRidge joined us in fixed income, really adding technologic -- fixed income technology and a great corporate trading business; and TriState Capital, a supplier to third parties of SBL and other financing have been great fits, as is Financo, Cebile and other things we've done in our capital markets business. The outlook is very uncertain in this environment, as we all know. A lot of things happening in the industry, record rise in interest rates. Some people, well, listen to CNBC every 5 minutes, just wait 5 minutes, someone will agree with your view on the economy. It's very, very uncertain. Rates are rising, cash sorting in the industry where cash is going to higher and higher yields, creating a new cash dynamic that we've had -- haven't had in 10 years in our industry. So the outlook is really kind of unpredictable. So -- but with that, we'll let Paul kind of give us a little predictability maybe at least for this week or this quarter.

For the rest of the day anyway. I'm Paul Shoukry, Chief Financial Officer of Raymond James. It's great to see a lot of familiar faces down here in sunny Florida. So thanks for coming down. I want to echo Paul's gratitude for coming down to the conference. I'll try to keep my remarks relatively brief because we want to allow plenty of time for Q&A. So think about your questions now and try to stump us or try to stump Paul after I'm done with my prepared remarks here. I'm going to give a financial overview. We have very consistent capital priorities. Paul touched on it, really focused on growth. We have a track record of generating operating leverage. It's quite simply growing revenues faster than we grow expenses so we can increase profitability over time. And we have a strong and flexible balance sheet, which has really served us well over the cycles here over the last 10, 20 years. Okay. Consistent capital priorities. This is our capital prioritization framework, which has really remained unchanged since our founding over 60 years ago, and that's really, first and foremost, investing in organic growth. We believe that organic growth generates the best risk-adjusted returns for shareholders. And really, we talk a lot about recruiting, but our organic growth and our best-in-class organic growth is really starts with retention. We have the best retention in the industry in the Private Client Group business. Our regrettable attrition is less than 1%. And that's because we treat our financial advisers like clients and they're coming over from firms and they're looking at other firms that don't do that. They don't treat the advisers like clients. They try to go around advisers that go direct to clients and sort of disintermediate that relationship, and we don't do that. We're just the opposite. Since our founding, we've always respected the adviser client relationship and treated both our clients and our financial advisers like clients. And we do the same thing in investment banking in all of our businesses where we really focus on providing a great platform and a great experience for all of our associates. And that -- on that foundation of best-in-class retention in our regrettable attrition in the Private Client Group business is less than 1%, which again is much lower, significantly lower than the averages in the industry. On that foundation of retention, we can grow attractively through recruiting experienced financial advisers and producers from the industry. The second priority in the capital prioritization framework is acquisitions and Paul showed the list of acquisitions. And Paul's always said, the way we look at acquisition opportunities is, first and foremost, it has to be a good cultural fit. If it's a good cultural fit, then it has to also be a good strategic fit. And only if it checks those 2 boxes, do we even look at the economics and modeling and valuation. And that sounds like common sense, but so many firms start with the accretion dilution analysis and try to force the other 2. And the reason that doesn't work is because we're in a people business and if it's not a good cultural fit, it's not a good strategic fit where there's a win-win for both the firm we're acquiring and for Raymond James, then you're not ultimately going to be able to keep the people and the people take the clients with them. And so we focus on first is being a good cultural fit, being a good strategic fit. And that's why going back to what I was talking about with organic growth, our retention post an acquisition has been best-in-class, whether you look at it in Private Client Group business or some of the deals in investment banking, for example, Financo, I don't see Jon Berg here, but that team not only has stayed in place, but we've actually added to the team as well. And so it made both of us stronger, and that's how we look at acquisitions. Dividend target of 20% to 30%. We try to stay pretty consistent with this range. We increased it from 15% to 25%, I think, in 2016 or '17, but we wanted to provide a steady dividend. We increased it by 24% in December to $0.42 a share per quarter. And we want to be in a position where we can maintain our dividend like we did during the financial crisis even when times are really tough. And then the last lever in the capital prioritization framework is the buybacks. And you see on the next slide here, we have a track record of being more opportunistic with buybacks. We bought in fiscal '19, 750 million, which at the time was, I think, 6% or 7% of our shares outstanding at the beginning of the year when the price dropped to $50 per share. So that's obviously been a very attractive price point to really beef up those buybacks, at least as we're looking back on it now. But we do have a commitment this year to buy back $1 billion of shares and that's really to offset the issuance associated with the TriState Capital acquisition last year as well as the share-based compensation dilution. So we started off the fiscal year at a slower pace, but we're going to hopefully accelerate that to get to the $1 billion target by the end of the fiscal year. But we're generating a lot of capital, and we're expecting to continue to generate capital. So we'll continue to be opportunistic beyond that $1 billion if it makes sense and depending on the other capital priorities that we have. We do have a track record of generating operating leverage, again, growing revenues faster than we grow expenses. We had a lot of criticism from '16 through '19 because we really did have to invest a lot to beef up our infrastructure, our control infrastructure during that period of time. But again, even during that period in the longer period, you see here over the 10 years starting in fiscal 2012, on an adjusted basis, almost every single one of those years, excluding the COVID year, we increased the pretax margin. So we -- even in that buildup of control infrastructure, we still increased our pretax margins during that period. And if you look at the last 2 years, about a 20% pretax margin on an adjusted basis, 18% on a GAAP basis in the last 2 years. And both of those years were records. And we're particularly proud of that because there are 2 very different years as you all know. In 2021, we didn't have any interest rate help at all, but we had market health, capital markets, investment banking, fixed income, generated records those years. And so the firm overall was able to generate a record. And then in fiscal '22, we had the interest rate help, but the markets were very challenging. As you know, the equity markets were down, so were the fixed income markets, and we were able to generate records in that year as well, really reinforcing what Paul shared earlier about the strength of the diversification of our platform, being able to generate records in both of those years, which were very different. Again, we haven't seen many other firms, if any, really be able to do that in those 2 different market environments. And then maintaining a flexible and strong balance sheet. Our regulatory capital ratios are over 2x the regulatory requirements to be well capitalized. When times are really good and everyone thinks they can predict exactly what's going to happen over the next year or 2, we get some criticism for being too conservative. But in these uncertain periods, I think people really appreciate that long-term view where we really try to make decisions over the next 5 to 10 years and through the cycles. And that served us very well. And as Paul said, you could see that the rating agencies appreciate that conservatism as well. We have over $2 billion of cash at the parent, over $1 billion to $1.2 billion target, which is very conservative. So we have a lot of excess cash, a lot of excess capital to kind of invest in growth as we described in the capital prioritization framework and to otherwise give back to shareholders if we can't use that capital and cash to invest in growth. One of the things that's been a big topic in our industry, as you all know, is the funding dynamic. We've had client cash balances peak about a year ago at around $76 billion. And we knew a year ago that a lot of that cash buildup was due to us being in a near 0 interest rate environment. So I think at this conference and other conferences, a lot of the investors were criticizing us for not using that cash and locking into securities with 3 to 4 years of duration or otherwise locking in that cash. And they asked why we didn't do it and we said because we don't know what the future holds. If rates rise a lot faster than we think and those securities go underwater and the cash gets reinvested in higher-yielding alternatives, then we don't want to be caught upside down. And at that time, that sounded like sort of an alarmist, maybe too conservative of a message. And certainly, as we look back at the last 12 months, with rates rising more than 450 basis points, that respect -- what we call the respect for the unknown and not sort of creating arbitrary book-ins on what might happen with rates or the markets has served us well. And it's not that we knew it was going to happen, but as we acknowledged that we didn't know what was going to happen. And sometimes that's just as valuable, if not more valuable than assuming you do know what's going to happen. And so that flexibility has been great. But the balances have declined from as we expected from $76 billion. The last release we had was less than $55 billion, and we said that, that cash sorting dynamic -- cash sorting is reinvesting those cash balances and higher-yielding alternatives like money market funds. That's persisted in February and so far in March. And so we have been looking at initiatives for quite some time now to diversify our funding sources. TriState Capital was an acquisition. I remember a year ago, when we announced that acquisition, we said one of the reasons we did that acquisition was to diversify our funding sources. And people didn't fully appreciate it at the time, but now it's being fully appreciated that they have an independent business with independent clients where they raise deposits. Now those deposits and the enhanced yield savings program, we really rolled out fully last Wednesday. They come at a higher cost than our sweep deposits, but we focus on strengthening and fortifying our funding sources, first and foremost and if you look at it on a blended basis, the cost is still relatively low and the risk-adjusted returns we can earn on those deposits is still very attractive. You see this is just another slide showing our capital position relative to many of our peers. Again, very strong balance sheet, really with a focus on flexibility and capital. So really, the focus over the next year is the capital -- from a financial perspective is investing in growth, using this capital and cash to invest in growth and also fortifying our funding sources. Again, we just launched enhanced yield savings program last week. It's -- on the onset, it's focused on new money to the platform. So we're giving it -- allowing advisers to use it as a client acquisition tool and to increase the wallet share of clients because most of the cash of clients hold away at other large banks are paying very little in their checking and savings accounts. The product we're launching is north of 4% -- 4% to 4.5% type rate. And so it's a very attractive rate for new money. Now we may open it up if we have the capacity and the demand, we may open it up to existing cash as well, just depending on the dynamics. But in the early innings, it's been received with a lot of interest from the financial advisers and their clients. So with that, I will open it up to Q&A.

Any questions? [Operator Instructions] Any questions? If not -- Thank you. We got one.

[indiscernible]

Yes. So I think in the -- we're still looking to build out some of the segments in our M&A platform. They've done a great job of growing them organically. There are a few segments that we think could be used -- beefed up and the same in kind of fixed income in our public finance businesses geographically. There are areas that we continue to grow. Our asset -- our third-party asset management business, Raymond James Investment Management is mainly mid- to large-cap asset -- active asset managers. So we're looking both at alternatives and some passive additions to that platform. So really, you can go across the board, even in our tax credit funds business. which is the largest third-party syndicator tax funds. We're looking at different kind of tax credit structures because we're in a leading position. So how do we grow the market. So you can look all the way across the board, and we still believe where there's opportunities that have culture fit and have strategic benefit like SumRidge brought some great automation in their trading systems on corporates, and we're looking how do we expand that to other areas because it's great technology into the fixed income business. So we're looking at some businesses, I would call to -- if we can make up words like cash sorting recently, we can electronify some of our other businesses and been actively looking still, but we're pretty selective on what we end up pursuing ultimately. Okay. If there are no further questions, thanks so much for attending.