Cohen & Company Inc. Q1 2024 Earnings Call Transcript

Quartr
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May 6, 2024

There are 3 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Cohen and Company's First Quarter 2024 Earnings Call. My name is Maria and I will be your operator for today. Before we begin, Cohen and Company would like to remind everyone that some of the statements the company makes during this call may contain forward looking statements under applicable security 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.

Operator

Cohen and 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 ks filed with SEC. Earlier today, Cohen and Company issued a press release announcing Q1 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 at 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.

Operator

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 Brathman, Chief Executive Officer of Cowen and Company. Please go ahead.

Speaker 1

Thank you, Maria, and thank you, everyone, for joining us on our Q1 2024 earnings call. With me on the call is Joe Pooler, our CFO. Look, we are pleased to report that our 2nd quarter of second consecutive quarter of strong earnings with a quarter adjusted pretax income of $7,700,000 and earnings per share of $1.28 2024 is really off to a great start. Coupled with our strong Q4, we have now generated over $24,000,000 of adjusted pretax income and $4.25 of earnings per share in the last 6 months, which is actually 65% of our current share trading price. Despite the challenging market environment, we continue to invest in our full service boutique investment banking operation, Cohen and Company, which we call CC or refer to as CCCM.

Speaker 1

During the past 2 years, we have repositioned the firm with a focus on CCM and are beginning to see our robust pipeline delivering through the income statement. We're particularly proud of the fact that over the last 12 months, CCM has been the leading advisor for all de SPACs. The CCM team has grown to 23 professionals and has developed a reputation for creatively solving capital market problems for all clients. Although deal execution and closing timeliness remain extended, we have strong momentum moving forward in 2024, which you can see in our results. CCM has generated over $24,000,000 of advisor revenue in the Q1.

Speaker 1

In addition to the strong CCM performance, we recognized substantial income from our equity method investments in the sponsors of 6 packs that closed their business combinations during the quarter. This income from Equity Method Affiliates was offset by charges at our non convertible non controlling interest line item. Nevertheless, the net of the 2 items remained positive for the quarter. So look, we have put a lot of effort into the SPAC space over the last few years and I'm really pleased that all this starting to pay off and we're seeing some monetization of that effort. But we don't expect the SPAC market to boom like it was in 2020 2021, we do feel that it is here to stay as a viable alternative for companies to access the public markets.

Speaker 1

The effort that we have put in has really entrenched us in that space and we believe we will continue to maintain our leadership position going forward. So addition to our Investment Banking business and Capital Markets, we've also rechanged we also revisit our trading businesses. So that is also off to a strong start, up 26% from the first Q4 of 2023. So we're in the process of transitioning this business from a wholesale business, which is really a dealer to dealer business to a middle markets business where we serve kind of smaller institutions that are underserved by large accounts. We feel this there's a lot of opportunity in this space given how larger firms are looking up towards larger accounts and a lot of the smaller boutiques are cutting back in terms of headcount leaving a large swath of clients that are really looking for service on a professional basis.

Speaker 1

To that end, in January we hired George Halstead as the Head of our New Deal Markets Group. We have since hired 4 additional traders and 2 salespeople into that area. We've also hired as at the end of the quarter, we've also hired another one this weekend to make it 3 salespeople. As we continue to build our talented team, we anticipate that the Mill Markets Group will contribute to profitability in the coming quarters. On the asset management side, the 4th quarter was a little bit quiet and we're hoping to have a couple of projects that we can talk about in the following quarters to come.

Speaker 1

Although our overall results were strong, we continue to experience unfavorable volatility and negative mark to market adjustments in our principal investing portfolio. In certain cases, we received investment banking consideration, investment in assets, and those assets have subsequently fallen to value. This has contributed to the negative volatility in principal transactions. Equity value of post business combination SPACs has continued to decline, leading many of the founders shares we received and representing our income from the equity method to decrease in value, negatively impacting the equity method and the principal transaction line items. Look, we anticipate this there's a couple of things on this.

Speaker 1

We anticipate this going forward. We'll continue until this kind of brings itself through the system and our pipeline kind of gets back to a little bit more cash heavy. And also it's not like a lot of this was done a lot of these investments were done for services rendered. So it's not as if we've invested the capital and are losing capital on the So really when I look at our business, I look kind of looking past the volatility of our Principal Investment segment and looking more towards long term value we're trading in both the capital markets area of our business, investment banking and trading, as well as our asset management business, which again we'll talk about the next quarter or 2. So look, we're excited about the overall momentum we're building and the opportunity we have to grow our top line revenue and profitability.

Speaker 1

We will continue to invest prudently in revenue generating talent and additional diversification of our offerings. Moving forward, we made focus on enhancing stockholder value and continue to pay our quarterly dividend. Now I will turn it over to Joe to walk through this quarter's financial highlights.

Speaker 2

Thank you, Lester. I will begin with a discussion of our operating results for the quarter. Our Q1 earnings follow a strong 4th quarter and represent an excellent start to fiscal 'twenty four. Our net income attributable to Cohen and Company Inc. Was $2,000,000 for the quarter or $1.28 per fully diluted share compared to net income of $4,500,000 for the prior quarter or $2.97 per fully diluted share and compared to net loss of $2,600,000 for the prior year quarter or $1.77 per fully diluted share.

Speaker 2

Our adjusted pre tax income was $7,700,000 for the quarter compared to adjusted pre tax income of $16,000,000 for the prior quarter and adjusted pre tax loss of $9,600,000 for the prior year quarter. As a reminder, adjusted pre tax income is a key earnings measurement for us as it incorporates enterprise earnings attributable to our convertible non controlling 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 and Company LLC, which is a consolidated subsidiary of Cohen and Company Inc. As Lester mentioned, we have generated in excess of $23,000,000 of adjusted pre tax income and 4 point quarter, an increase of $5,700,000 from the 4th quarter and $23,500,000 from the year ago quarter. CCM closed 13 deals and generated all of the new issue and advisory revenue in the quarter.

Speaker 2

Net trading revenue came in at $9,800,000 in the 1st quarter, up $2,000,000 from the 4th quarter and $1,600,000 from the Q1 of 'twenty 3. 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 $2,700,000 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 Pride funds that was recorded in the current quarter. 1st quarter principal transactions and other revenue was negative $18,400,000 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 advisor, which has resulted in increased holdings of public equity positions in post business combination companies.

Speaker 2

Equity value of post business combination SPACs has continued to decline, leading many of the founder shares we received to decrease in negatively impacting the principal transactions line item. In addition, in certain cases, we receive investment banking consideration from de 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 includes all gains and losses and income earned on our $39,300,000 net investment portfolio on the balance sheet. Compensation and benefits expense for the quarter was $14,800,000 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, net of our non convertible noncontrolling interest and the related impact on variable incentive compensation.

Speaker 2

The number of company employees was 100 and 16 at the end of the Q1 compared to 118 at the end of the year. Net interest expense for the quarter was $1,700,000 including $1,200,000 on our 2 trust preferred debt instruments, dollars 127,000 on our senior notes, dollars 19,000 on our credit line and $359,000 on our redeemable financial instrument. Income from Equity Method Affiliates during the Q1 totaled $29,000,000 This amount included $32,700,000 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 founders shares to which we are entitled to an allocation from those sponsors. During the quarter, there was also an offsetting charge of $16,700,000 related to these 6 back closings recorded in the net income loss attributable to the non convertible non controlling interest. These non convertible non controlling interests represent ownership in certain of our consolidated subsidiaries by the portfolio managers of our current SPAC Series funds.

Speaker 2

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 point $3,000,000 compared to $91,800,000 as of December 31. The non convertible non controlling interest component of total equity was $25,900,000 at the end of the quarter $9,600,000 at the end of the year. Thus, the total enterprise equity excluding this non convertible non controlling interest component was $87,400,000 at the end of the quarter, a $5,200,000 increase from the $82,000,000 at the end of the year. At quarter end, consolidated indebtedness was carried at $29,700,000 and our redeemable financial instruments were carried at 7,900,000 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.

Speaker 2

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.

Speaker 1

Thanks, Joe. Please direct any offline investor questions to Joe Pooler at 215 7018952 or via email to investorrelationsconeandcompany.com. 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.

Operator

Thank you. We will now be conducting a question and answer It appears that there are no questions at this time. I would now like to turn the floor back over to Lester Brackman for closing comments.

Speaker 1

Thanks, Maria. I'm proud of our results in the Q1 and I want to thank all our members and team members for the dedication, especially as we continue to face a challenging market environment. With strong performance over the last two quarters, we have great momentum across the business and are well positioned for the year ahead. Thanks again for enjoying the call and have a good day.

Operator

This concludes today's teleconference. You may disconnect

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Key Takeaways

  • Cohen reported Q1 adjusted pretax income of $7.7 million and EPS of $1.28, building on Q4 to produce over $24 million in adjusted pretax income and $4.25 EPS in the past six months.
  • The boutique investment banking arm (CCM) achieved over $24 million in advisor revenue for Q1, closed 13 deals, and solidified its position as the leading de-SPAC advisor with a 23-person team.
  • Trading revenue rose 26% from Q4 2023 to $9.8 million in Q1 as the firm pivots from wholesale to middle-market trading, hiring a new head and expanding its sales and trading staff.
  • Principal transactions incurred a net loss of $18.4 million due to mark-to-market losses on SPAC-related investments and founder shares, signaling ongoing volatility in the principal portfolio.
  • The company declared a quarterly dividend of $0.25 per share for June payment, with the board to reassess dividend policy each quarter based on results and capital needs.
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Earnings Conference Call
Cohen & Company Inc. Q1 2024
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