Transcript
Good morning, ladies and gentlemen, and welcome to the Cohen & Company's First Quarter 2024 Earnings Call. My name is Maria, and I will be your operator for today. Before we begin, Cohen & Company would like to remind everyone that some of the statements the company makes during this call may contain forward-looking statements under applicable securities laws. These statements may involve risks and uncertainties that could cause the company's actual results to differ materially from the results discussed in such forward-looking statements. The forward-looking statements made during this call are made only as of the date of this call, and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances. Cohen & Company advises you to read the cautionary note regarding forward-looking statements in its earnings release and in its most recent annual report on Form 10-K filed with the SEC. Earlier today, Cohen & Company issued a press release announcing its first quarter 2024 financial results. Today's discussion is complementary to that press release, which is available on the company's website at cohenandcompany.com. This conference call is being recorded, and a replay of it will be available for 3 days beginning shortly after the conclusion of this call. The company's remarks also include certain non-GAAP financial measures that management believes are meaningful when evaluating the company's performance. A reconciliation of these non-GAAP financial measures to the comparable GAAP measures is provided in the company's earnings release. After the prepared remarks, the call will be open for questions. I would now like to turn the call over to Mr. Lester Brafman, Chief Executive Officer of Cohen & Company. Please go ahead.
Thank you, Maria, and thank you, everyone, for joining us on our first quarter 2024 earnings call. With me on the call is Joe Pooler, our CFO. We are pleased to report our second consecutive quarter of strong earnings, with adjusted pretax income of $7.7 million and earnings per share of $1.28. 2024 is really off to a great start. Along with our strong fourth quarter, we have generated over $24 million of adjusted pretax income and $4.25 of earnings per share in the last 6 months, which represents 65% of our current share trading price. Despite a challenging market environment, we continue to invest in our full-service boutique investment banking operation, Cohen & Company, also known as CC or CCM. Over the past two years, we have repositioned the firm with a focus on CCM and are beginning to see our robust pipeline reflected in our income statement. We are particularly proud that over the last 12 months, CCM has been the leading adviser for SPACs. The CCM team has grown to 23 professionals and has established a reputation for creatively solving capital market problems for our clients. While deal execution and closing timelines remain extended, we have strong momentum moving into 2024, which is evident in our results. CCM generated over $24 million of advisory revenue in the first quarter. In addition to the strong CCM performance, we recognized substantial income from our equity method investments in the sponsors of six SPACs that completed their business combinations during the quarter. This income from equity method affiliates was offset by charges in our nonconvertible, noncontrolling interest line item, but the net of the two items remained positive for the quarter. We have invested significant effort into the SPAC space over the past few years, and I am pleased to see those efforts beginning to pay off. However, we do not expect the SPAC market to see the same boom it had in 2020 and 2021, though we believe it will remain a viable option for our access to public markets. Our dedication in this space has solidified our leadership position moving forward. In addition to our investment banking business and capital markets, we are also revamping our trading operations, which is off to a strong start, up 26% from the fourth quarter of 2023. We are transitioning this business from a wholesale dealer-to-dealer model to serving smaller institutions that have been underserved by larger firms. Given how larger firms are focused on bigger accounts and smaller boutiques are cutting back on headcount, we see a significant opportunity in this area. In January, we brought on George Holstead as the head of our new Middle Markets Group, along with hiring four additional traders and two salespeople in that area. We recently hired another salesperson this weekend, bringing the total to three new hires. As we continue to build our talented team, we expect the Middle Markets Group to contribute to our profitability in the upcoming quarters. The asset management segment was somewhat quiet in the fourth quarter, but we hope to discuss a few projects in the coming quarters. Although our overall results were strong, we have been facing unfavorable volatility and negative mark-to-market adjustments in our principal investing portfolio. In some cases, we received investment assets through investment banking considerations, but those assets have subsequently lost value, contributing to negative volatility in our principal transactions. The equity value of post-business combination SPACs continues to decline, reducing the value of founder shares we received as part of our income from equity method affiliates, which negatively impacts both the equity method and principal transaction line items. We anticipate that this situation will continue until our pipeline becomes more cash-heavy. Many of these investments were made in exchange for services rendered, so it's not as if we invested capital that we are now losing, which can be somewhat misleading in our principal transaction line. When considering our overall business, I focus on the long-term value we are creating across our capital markets, investment banking, trading, and asset management segments, which we will discuss further in the next couple of quarters. We are excited about the momentum we are building and the opportunities we have to grow our top line revenue and profitability. We will continue to invest prudently in revenue-generating talent and diversify our offerings. Moving forward, we remain committed to enhancing stockholder value and maintaining our quarterly dividend. Now, I will turn it over to Joe to go through this quarter's financial highlights.
Thank you, Lester. I will begin with a discussion of our operating results for the quarter. Our first quarter earnings follow a strong fourth quarter and represent an excellent start to fiscal '24. Our net income attributable to Cohen & Company Inc. was $2 million for the quarter or $1.28 per fully diluted share compared to net income of $4.5 million for the prior quarter or $2.97 per fully diluted share and compared to net loss of $2.6 million for the prior year quarter or $1.77 per fully diluted share. Our adjusted pretax income was $7.7 million for the quarter compared to adjusted pretax income of $16 million for the prior quarter and adjusted pretax loss of $9.6 million for the prior year quarter. As a reminder, adjusted pretax income is a key earnings measurement for us as it incorporates enterprise earnings attributable to our convertible noncontrolling interest which is substantially held by our Founder and Chairman, Daniel Cohen. Daniel holds his interest in the enterprise through our primary operating subsidiary, Cohen & Company LLC, which is a consolidated subsidiary of Cohen & Company Inc. As Lester mentioned, we have generated in excess of $23 million of adjusted pretax income and $4.25 of earnings per share over the last 6 months. New issue and advisory revenue was $24.4 million in the first quarter, an increase of $5.7 million from the fourth quarter and $23.5 million from the year-ago quarter. CCM closed 13 deals and generated all of the new issue and advisory revenue in the quarter. Net trading revenue came in at $9.8 million in the first quarter, up $2 million from the fourth quarter and $1.6 million from the first quarter of '23. The increase from both of the prior quarters was due primarily to higher trading revenue from our corporate and mortgage groups. Our asset management revenue totaled $2.7 million in the quarter, which was up $800,000 from the prior quarter and $700,000 from the prior year quarter. The increase from the prior quarters was due primarily to a deferred performance fee in one of our private funds that was recorded in the current quarter. First quarter principal transactions and other revenue were negative $18.4 million, primarily due to mark-to-market adjustments on our principal investments related to our involvement in the SPAC market as a sponsor, asset manager, investor and adviser, which has resulted in increased holdings of public equity positions in post-business combination companies. The equity value of post-business combination SPACs has continued to decline, leading many of the founder shares we received to decrease in value, negatively impacting the principal transactions line item. In addition, in certain cases, we receive investment banking consideration from these SPAC clients in the form of investment assets and those investment assets have subsequently fallen in value. We anticipate that there will continue to be some volatility in our principal portfolio and our operating results going forward as a result of that volatility. Principal transactions include all gains and losses and income earned on our $39.3 million net investment portfolio on the balance sheet. Compensation and benefits expense for the quarter was $14.8 million, which was down from the prior quarter and up from the prior year quarter, primarily due to the fluctuations in revenue, income from equity method affiliates, and net of our nonconvertible noncontrolling interest and the related impact on variable incentive compensation. The number of company employees was 116 at the end of the first quarter compared to 118 at the end of the year. Net interest expense for the quarter was $1.7 million, including $1.2 million on our 2 trust preferred debt instruments, $127,000 on our senior notes, $19,000 on our credit line, and $359,000 on our redeemable financial instrument. Income from equity method affiliates during the first quarter totaled $29 million. This amount included $32.7 million of income from our equity method investments in the sponsors of 6 SPACs that closed their business combinations during the quarter, which resulted in an increase in the value of the founder shares to which we are entitled to an allocation from those sponsors. During the quarter, there was also an offsetting charge of $16.7 million related to these 6 SPAC closings recorded in the net income loss attributable to the nonconvertible noncontrolling interest. These nonconvertible noncontrolling interests represent ownership in certain of our consolidated subsidiaries by the portfolio managers of our current SPAC series funds. The charge is generally an offset to the amounts we record in our net income from equity method affiliates. In terms of our balance sheet, at the end of the quarter, total equity was $113.3 million compared to $91.8 million as of December 31. The nonconvertible noncontrolling interest component of total equity was $25.9 million at the end of the quarter and $9.6 million at the end of the year. Thus, the total enterprise equity, excluding this nonconvertible noncontrolling interest component, was $87.4 million at the end of the quarter, a $5.2 million increase from the $82 million at the end of the year. At quarter end, consolidated indebtedness was carried at $29.7 million, and our redeemable financial instruments were carried at $7.9 million. As Lester mentioned, we have declared a quarterly dividend of $0.25 per share payable on June 5 to stockholders of record as of May 20. The Board of Directors will continue to evaluate the dividend policy each quarter and future decisions regarding dividends may be impacted by quarterly operating results and the company's other capital needs. With that, I'll turn it back over to Lester.
Thanks, Joe. Please direct any offline investor questions to Joe Pooler at (215) 701-8952 or via e-mail to [email protected]. The contact information can also be found at the bottom of our earnings release. Operator, you can now open the call lines for questions, and thank you all for joining us today.
Thank you. We will now begin the question-and-answer session. It seems there are no questions at this time. I would now like to hand it over to Lester Brafman for closing comments.
Thanks, Maria. I'm proud of our results in the first quarter, and I want to thank all our members and team members for their dedication, especially as we continue to face a challenging market environment. With strong performance over the last 2 quarters, we have great momentum across the business and are well positioned for the year ahead. Thanks again for joining the call, and have a good day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.