Andrew Duff - Chairman and CEO Debbra Schoneman - CFO.

Mike Adams - Sandler O'Neill Hugh Miller - Macquarie.

Good morning and welcome to the Piper Jaffray Companies Conference Call to discuss the Financial Results for the Second Quarter of 2016. During the question-and-answer session, securities industry professionals may ask questions of management.

The Company has asked that I remind you those statements on this call that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties.

Factors that could cause actual results to differ materially from those anticipated are identified in the Company's earnings release and reports on file with the SEC, which are available on the Company's website at www.piperjaffray.com and on the SEC website at www.sec.gov.

This call will also include statements regarding certain non-GAAP financial measures. Please refer to the Company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release is available on the Investor Relations page at the Company's website or at the SEC website.

As a reminder, this call is being recorded. And now, I'd like to turn the call over to Mr. Andrew Duff. Mr. Duff, you may begin your call..

Good morning and thank you for joining us to review our second quarter results. I will spend a few minutes providing some macro observations on our results and the markets for the quarter. And Deb will provide more specific highlights on our financial performance.

The headline for the quarter, is that a combination of relatively strong performance in reasonably good markets drove a 10% sequential increase in our adjusted revenue and a 26% sequential increase in our adjusted EPS. Sequential improvement in our adjusted comp ratio, plus share repurchasing activity also contributed to the improvement in EPS.

Over the past several years, we have executed on a growth strategy intended to shift our mix to a higher margin business, while maintaining diversity in our mix.

The diversity across our business served us well this quarter, as sequential improvement in several areas more than offset an expected slowdown from the remarkable pace we achieved in our Advisory business over the past two quarters.

Strategic investments in our fixed income related areas over the past couple years helped drive an 85% sequential improvement in these areas. Notably in public finance, we produced a record quarter, exceeding the prior record set in Q2 of last year by about 20%.

For the quarter, we encountered markets that on the whole were more constructive for us than earlier in the year. For example, we started to see the first green shoots of a recovery in equity capital raising. Absent any episode of heightened volatility, we expect equity capital raising to improve steadily in the second half of the year.

Also capital raising in the tax exempt markets remained strong, driven by low interest rates. The major macro event which impacted markets late in the quarter, of course was the result of the Brexit vote. I think it's fair to say that the results surprise the markets as volumes and volatility spiked in both equity and fixed-income classes.

We further de-risked our balance sheet and reduced inventories in front of the vote and emerge from the turmoil relatively unscathed. Since the vote, we saw a flight to the safety of U.S. markets, particularly U.S. treasuries and municipal bonds as well as U.S. equities, driving rates down and indices up.

In asset management, market conditions were more favorable for yield-oriented products, but remained challenging for most active managed strategies, particularly domestic equities.

As a firm, ultra-low interest rates benefit some of our activities like public finance, but they have been and continue to be punitive to active managers With the current interest rate levels which touched on historic lows recently, we continue to see broad flows into equities in the search for yield.

These flows have driven market-wide valuations indiscriminately higher and mostly divorced from the underlying value of individual stocks. This phenomenon is characterized as low dispersion with little [differentiation] in returns.

Active managers focused on the fundamental factors such as strong cash flow, low debt, high growth rates, etcetera, are not rewarded for investing in better companies. In a market where low-growth and high-growth companies trade at the same earnings multiple, for example, the value of active management gives way to the low cost of passive products.

Our own experience in Asset Management mirrors the market. MLP in our international products generally benefited from the search for yield. Our domestic value products suffer from the low dispersion. The investment performance of our products is reflective of the environment as well.

Our better performing products focus on the relatively inefficient market segments like small cap or emerging markets. As we move up cap into more efficient markets, our relative performance tends to lag.

Nevertheless, we feel it is incumbent on us to remain committed to our defined investment process for each of the products and continue to seek alpha within that context. We also are expanding our efforts to add products to our platform that will be attractive across a range of market conditions.

I want to shift to our strategic growth initiatives for a moment. Our FIG buildout on balance is meeting our expectations. The banking business is gaining traction as we have moved into the top 10 in deal activity in the space. A fundamental strategy for the firm is to lead with industry expertise and leverage the expertise across multiple products.

We continue to shape our FIG buildout to conform to this model. We are pleased with the addition of Simmons as we completed our first full quarter together. Advisory activity in the energy sector is still challenged. We are encouraged with the integration of our product groups together with Simmons' industry expertise and relationships.

We believe this bodes well for the long-term success of the combination. The strong performance you see in our fixed income brokerage business reflects the meaningful contributions from the GKST team. This team continues to perform well and has been a welcome addition to the firm.

Finally, with the challenging conditions in asset management, we also see opportunities. Over the past couple of years, we have evolved our business into a multi-manager model by developing a core set of services that can support a number of distinct investment teams.

We are actively seeking teams that may be looking for a new, more stable platform driven by challenging market conditions or the evolving regulatory regime. We will consider teams that are additive to our product suite and fill a differentiated niche in the market. Now, I'd like to turn the call over to Deb to discuss our results in more detail..

Thanks, Andrew. As context, my remarks will be focused on our adjusted results. As Andrew highlighted, the diversity in our business mix positioned us for a strong quarter on the strength of sequential improvements in our capital raising and brokerage activities, which more than offset the expected decline in advisory revenues.

Capital raising across both equity and debt products substantially outpaced the market during the quarter. Our public finance business produced a stellar quarter with record results as we fired on all cylinders. We took advantage of our geographic range with strong results in California, Texas and Kansas.

Our industry expertise also propelled our results, particularly in the senior living sector, an area of investment for us over the past couple of years. We believe market conditions are lining up for activity to remain strong as low interest rates are driving both new issue and refinancing activity.

Our equity capital raising was up 160% sequentially versus a 57% increase in fee pool for our focused sectors. While our activity is still at relatively modest levels, we are seeing some momentum building subject to stable market conditions.

In the advisory area, as Andrew noted in his opening remarks, activity levels subsided with revenue declining sequentially. It is however important to note that our advisory revenues were still up about 9% year-over-year, which reflects our long-term efforts to grow this business.

For example, we are starting to realize contributions to our advisory results from our FIG team. Moving on to brokerage activities, both equities and fixed income generated sequential gains in the quarter. Equities were up 15% sequentially and 11% year-over-year. These gains generally reflect the full quarter of contributions from the Simmons team.

The strength we saw in fixed income brokerage, up almost 70% sequentially and 40% year-over-year, was attributable to the combination of better markets and a broader platform. The market provided a more conducive environment for our trading P&L.

We are seeing the flight to safety experienced in treasuries still over to the municipal bond asset class as well. Given our relative exposure to munis, we have benefited from tightening credit spreads in municipal bonds.

Compared to the prior year, our broader platform with the addition of the GKST team has led to increased activity on our flow desk, commensurate with the resources we have brought on board. In addition, our flow desk enjoyed robust clients' activity during the quarter contributing to our strong performance.

Switching to Asset Management, management fees at ARI were flat sequentially. There were several moving pieces that balanced out to produce a flat quarter. On the positive side, we benefited from market appreciation, predominantly in our MLP products. We also saw some slight net asset inflows in these products during the quarter.

Offsetting the market appreciation, second quarter marked a full quarter impact of net outflows we suffered in Q1, primarily in our value products. These outflows subsided meaningfully in the second quarter and were partially offset by some market appreciation in these products during the quarter.

I will spend a few minutes on the cost side of the ledger. Our comp ratio moderated in the quarter, coming in a little over 64%. Improved performance across several of our businesses, plus some investment gains in the mix, brought the comp ratio back down albeit at the high end of our targeted range.

Our non-comp expenses of $38.6 million met our expectations. The non-comp level incorporates a full quarter of Simmons expenses.

We are proud of the fact that we achieved the bulk of the cost synergies targeted in our acquisitions at close, but we're also cognizant that our growth initiatives of the past couple of years have increased our non-comp levels by over 20%.

Given market conditions in our current revenue levels, we have engaged in the process to analyze our non-comp expenses at a granular level to ensure we are operating efficiently and producing the best possible returns for our shareholders. Before we open up for questions, I wanted to provide an update on our share repurchase efforts.

For the quarter, we bought back 1.1 million shares at an average price of $40 per share. Our common shares outstanding ended the quarter at 12.4 million shares and our average share count for the quarter was 12.9 million shares.

Including our repurchases in Q2 we have now more than offset the dilution from the Simmons transactions as well as shares issued to employees in 2016. We continue to assess regularly our various uses of capital, including trading, corporate developments, investing and share repurchases. As we manage our capital to generate profitable returns.

We will now open up the call for questions..

[Operator Instructions] And our first question comes from the line of Mike Adams with Sandler O'Neill..

Deb, so maybe starting with a question for you just based on some of your commentary there.

So in terms of the review of the cost base given some of the challenging market conditions here, what's sort of the rough time frame for completing the review and when could we potentially start to see some of the benefits? And then, are there any particular areas that are under scrutiny?.

Yes, so let me just start by saying it $38.6 million where we ended up the quarter. We're at the low range that we did guide to before and we feel good about that given the market conditions, but still at 23% non-comp ratio.

And so we are really looking across non-comps, I would say there is no one area and particularly, obviously we focus on those areas initially that we know we can have the biggest impact, whether it's travel entertainment or data communications-type costs where we have a lot of control. So we're really looking across.

In terms of when you could see impact and what that impact would be, while we are in the middle of this review, we have right now identified about a $1 million of savings on a quarterly basis and we will just really have to update you in the next quarterly call and where that comes out..

Okay.

I mean, could we expect to see some of that improvement at $1 million? Could that show up in the fourth quarter or is this more of a 2017 type event?.

No, this is something that we are actively pursuing and seeing some of these adjustments showing up this year..

And then, maybe flipping over to the comp ratio, I mean 64%, I think that was the target you had talked about on our last call.

So how should we think about improvement there? It sounds like the review is not focused on personnel, so is this really just going to be continued revenue improvement driving that down?.

For the most part, I would say the thing is that we are somewhat focused on looking at the expense reductions on that side as well, I mean that's somewhat how we even got to the 64% this year.

As you know, and we've talked about before, our business mix obviously impacts that, but ultimately we do expect the comp ratio for the remainder of the year to trend down and we are working towards a comp ratio target of 64% for the full year..

Okay. Got it. Thanks, Deb. And then, maybe touching on the merchant banking gains that you guys recognized this quarter, they were pretty outsized.

Could you just give a little bit more detail on the drivers behind that and then just speak to, does this influence compensation anyway? Are there any payouts on those gains?.

Yes. So what happens Mike is primarily if you think about merchant banking, we have a fund which is mark to market as we, on a quarterly basis. However, at times, there are transactions that you still have some liquidity or uncertainty, liquidity discount or uncertainty about. So you haven't taken the full marks.

Ultimately, they had recognized the full liquidity events in one of the investments within that portfolio and therefore we took the final mark. We had been marking that investment along the way.

In terms of how that impacts compensation, that is helpful to our compensation ratio as the actual compensation accrued against those revenues is quite low compared to other products..

Got it..

Mike, maybe I would just add one last thing. The mark that Deb reflected did show up in the quarter, but I would say the performance of the portfolio and the investment is tracking to what we would expect in a year, right. So not outsized from that perspective..

Okay. Thanks, Andrew. And then, touching on the strength in the fixed income business this quarter that was probably one of biggest surprises from my seat at least. And I'm just trying to look at this like ever since the GKST team came on board, it's just been a much more volatile line and I know the market conditions have been pretty choppy.

But maybe if you could just help us like try to understand today when we look at that line how much of it is flow revenue versus trading revenue that might allow us to like zero in a little bit when we're trying to model this out?.

So when I give you the first some context and maybe Debb wants to add some specifics. Our performance quarterly is a blend of flow and some P&L, the majority of which is flow.

From a P&L perspective, the thing that's probably going to most impact it is credit spreads widening and tightening and then we've talked about this before, in particular for us, it's going to be municipal speeds.

And if they're expanding rapidly due to market dynamics that's going to reduce our P&, if they're tightening in tightening consistency leave with good new issue volume, we're going to get some good P&L..

Yes, I guess I would add. Mike, if you look over the last few quarters and you said since GKST gets come on board.

If you go back to the fourth quarter of last year when we fully completed that acquisition, you saw the revenues increased quite substantially, that would primarily driven by adding on all of those additional salespeople with the constructive market from a trading P&L perspective.

As we talked about last quarter on the call, what you saw this significant decline which was really a result of not having the markets that were conducive and not having some of that trading P&L helping some of like the first quarter ended up being a little more of an outlier than what you saw in the fourth and second quarters, if that makes any sense..

And maybe one more final comment, part of this strategy with that team joining us was really threefold, additional distribution from sales, some trading expertise and a couple of asset classes that was superior. And then, finally, we believed that we could reduce the capital with the increased revenue.

And if you look at our bar continues to come down. We are accomplishing that..

And last follow-up from me, Deb.

When we're looking at the first quarter and the fixed-income commission results here, is it fair to assume the majority of that was customer flow, very little trading gains in the first quarter?.

Yes..

[Operator Instructions] And our next question will come from the line of Hugh Miller with Macquarie..

So definitely appreciate some of the insight you kind of gave on the equities and some of the opportunities and challenges there in that business.

Wanted to see if you first on the housekeeping level, if you could give us a sense of the rough break out for AUM between the two strategies, between MLPs and equities? And then, obviously, we've seen a rebound in the valuation for MLPs. I think you guys alluded to that you saw some modest inflow activity with that particular strategy.

But if you can just give us a sense of what you're hearing in terms of demand for that product given how much things have changed over the last year and whether or not there is increased demand for that product?.

So let me start, Hugh, and just give you where we ended up the second quarter. We have $4.4 billion in AUM in our MLP products and $3.7 billion in our value products. I'll let Andrew..

Yes, so from a flow perspective Hugh, I'd call it healing after the precipitous decline, we did have net inflows in MLP is for the each month of last year as a decline. That did turn to some modest outflows in Q1 as it bottomed out. And then as we mentioned we've turning now to the modest inflows. So I think that's fairly indicative.

If this going to stabilize and continue to improve from here, I think we could expect that we're going to start getting flows into the product again. In particular, some we have a set of products, some are more institutionally or some are more retail oriented, I think particularly for the retail to have that kind of decline really causes a pause.

But when you relook at it now in the endless search for yield, it's pretty attractive, if you had some confidence and thought oil would stabilize, it's attractive..

And as you think about kind of some of the investments you're considering making on the equity side of things, I think you guys have mentioned just looking at things that might work better at different parts of the cycle.

Are you looking at both passive and active and other particular strategies that seem more inappropriate to the bolt-on for we have now?.

So could of things. One I'd start with the context, again, with this environment being as challenging as it has been. We're experiencing some of that, it's very challenging for others as well and we are seeing product opportunities with some regularity and we're spending some time on it.

We would be much more inclined to active; passive, while it's enjoying and obviously doing very well, I think that's very much a scale business and we would be late and small. So neither of those is particularly appealing.

Some areas where we would not have overlap would be a global product, maybe some yield and growth and again we would look for niche strategies that could be differentiated. I do think part of the past passive, this is my view and not the view for the firm. The passive trend is real obviously and it's been here with ETFs.

I also think it has to some degree a cyclical quality that is reflected in very low interest rates, very low dispersion. Why don't I just get the most efficient product that I can, if we return to more normalized markets. You can see alpha from good fundamental work, then we would like to have a broader set of products..

Got you. Okay, that's very helpful. And I guess, turning to the energy vertical, it seems like you guys mentioned that M&A opportunities there seem to still be challenged. Obviously we've seen a dramatic change so far this year in terms of crude prices.

It seems as though from what we hear that at some point, you start to see some consolidation in that space.

Want to get a sense as to the conversations that you're having with clients, is there a change in sentiment regarding a consideration in putting capital to work and looking ahead M&A, are we still a bit little far off from that? Any thoughts as to whether or not sentiment has changed at all so far this year?.

So it has changed and it's definitely improving. One of the ways I think about it, Hugh, a little bit is, there is essentially this air pocket as for nine to 12 months oil declined just week after week after week and bottomed in February at $26.

It just created an air pocket, it's sort of impossible to put together buyers and sellers in that environment and as it's stabilized now for let's call it three months, the sentiment is definitely shifted.

Our pipeline is solid and with this stability, our pipeline keeps growing, and we certainly have an improved outlook for the second half of the year..

Okay, that's helpful. And then just touching on the FIG expansion, obviously, you mentioned some of the successes you're having there and generating some opportunities on the M&A side. I believe that there's been a little bit of changes in terms of some of the coverage and so forth with personnel.

Can you just give us a sense as to how we should be thinking about? Do you feel as though the platform is kind of largely in place here? Do you anticipate or you're going to continue to make additional investments over the coming quarters? How should we think about that?.

Good. So I'd start with saying our fundamental strategy for the firm, again is to lead with the industry expertise and leverage that across the products. So some of the turnover you saw is optimizing our business against the market opportunity.

So, we did reduce coverage in sectors like insurance, but we're aligning it really around our core franchise which will be depositories and in that. I'd say from a sales trading research the resources are in place.

We continue, have added a couple this year and will continue to look to selectively add bankers in both getting a full national footprint on the depository and some additional resources over time into FinTech, and expect that really to be our go forward big franchise..

Yes, and this is definitely helpful. Are there other sub-verticals within FIG outside of FinTech and depositories that you're keen on or do you feel as though that's likely to be the focus in the near term..

Hey, I would add specialty finance and those three would really be what I'd anticipate being our focus for the next couple of years, and again I believe we've got to distinguish ourselves in a couple of areas first, and then you can do adjacencies that those three would be absolutely our focus for the coming 12 months, 24 months..

And then lastly, from me, if you can just give us maybe an update on the healthcare side of the business and where you're seeing in terms of a pipeline and reaction, I guess in terms of a regulation and those types of things, how would you view kind of the pipeline for that vertical relative to where we were maybe six months to 12 months ago?.

So our pipeline there is solid and continues to be from a capital raising, obviously the biotech opportunity moderated very substantially. I guess you could [indiscernible] shut down for a quarter, maybe almost two, but from an M&A perspective, our backlog in healthcare is very solid..

And at this time, we have no further questions. I'll turn the conference call back over to management for closing remarks..

Thank you all for joining us this morning. We look forward to updating you on the third quarter. Thank you..

Once again, we would like to thank you for your participation on today's conference call. You may now disconnect..