Good morning, and welcome to the Piper Sandler Companies' Conference Call to discuss the Financial Results for the Second Quarter of 2023. During the question-and-answer session, securities industry professionals may ask questions to management. The company will make forward-looking statements on this call that are not historical or current facts, including statements about beliefs and expectations and 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.pipersandler.com and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the Investor Relations page of the company's website and at the SEC website. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

Good morning, everyone. Thanks for joining us today to talk about our second quarter results. I'm here with Deb Schoneman, our President, and Tim Carter, our CFO. In a challenging second quarter of 2023, Piper Sandler generated adjusted net revenues of $277 million and adjusted EPS of $1.13. Activity across most of our businesses continued to be muted as a cloudy economic outlook has kept many clients and transactions on the sidelines, waiting for the inflection point to better market conditions. We remain focused on helping our clients navigate a highly dynamic economic landscape. When markets stabilize, we expect activity levels to accelerate and we believe that we are strongly positioned to help our clients transact across our various product and business lines. Turning to corporate investment banking, we generated revenues of $167 million during the second quarter of 2023, flat compared to the first quarter. Highlighting the benefits of our diversified product and industry set, increased corporate financing activity offset a decline in advisory service revenues for the quarter. Specific to advisory services, revenues of $130 million for the quarter reflect the continuing challenges in the M&A and debt markets. We completed 61 advisory transactions during the quarter. Performance was led by our healthcare group with solid contributions from our energy and power and restructuring teams. The decline in our advisory activity for the quarter was largely driven by a market-wide reduction in bank advisory transactions. The outlook for bank M&A over the next six months remains challenging, negatively impacted by company and portfolio valuations, a lack of clarity around credit quality, and an uncertain regulatory capital framework. However, the longer-term outlook for consolidation and capital markets activity in the depository space is compelling, and our market-leading bank franchise is well positioned to advise clients when the market improves. Overall, our performance on a relative basis remained solid. Completed U.S. M&A market activity is down approximately 50% compared to the first half of last year, while our revenues are down 29%. On a year-to-date basis, we maintained our ranking as the number two advisor on announced U.S. M&A transactions under $1 billion. Importantly, the outlook for M&A is improving. We have a number of larger announced deals expected to close in the second half of this year as well as a strong pipeline of deals that have kicked off the sale process. We expect advisory services revenues for the second half of 2023 to be better than the first half. Turning to corporate financing. The equity financing market improved during the second quarter with lower volatility levels and an increase in investor demand for new issuance. However, activity continues to remain below historic levels. For context, 21 IPOs priced in the market during the second quarter of 2023 compared to an average of 102 IPOs per quarter for the last five years. We generated $37 million of corporate financing revenues during the second quarter of 2023, up on a sequential basis. We completed 24 equity and debt financings, raising $5 billion in capital for corporate clients. Activity was driven by our market-leading healthcare franchise, which ran the books on all 14 deals completed during the quarter, including one of the largest biotech IPOs in history. Highlighting our strong relative performance, on a year-to-date basis, our economic fees from sub $5 billion market cap companies increased approximately 200% compared to a 30% increase in the fee pool for this market. In addition, we ranked as a top five investment bank based on a number of book-run deals for healthcare companies with less than $5 billion of market cap. As we look ahead, we expect financing activities to continue building as we progress through 2023. Turning to investment banking managing director headcount. MD headcount remained flat sequentially, finishing the quarter at 171 managing directors. We added two MDs during the quarter, one to continue growing our real estate team and one to further expand our restructuring practice. These additions were offset by planned attrition. We remain focused on strategically managing headcount and driving productivity, while at the same time continuing to strengthen our sector coverage and product capabilities to ensure we have the resources to execute against market opportunity as conditions improve. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.

Thanks, Chad. During the second quarter of 2023, our public finance business generated $17 million of municipal financing revenues, flat compared to the first quarter. Market conditions remain challenging with higher nominal rates, interest rate volatility, and weak investor demand. For the quarter, we underwrote 109 municipal negotiated transactions raising $2.4 billion of par value for our clients. Our results continued to be disproportionately impacted relative to the overall market issuance due to our meaningful presence in the high-yield sector and our middle market focus within the governmental business. As we look ahead, our pipeline is large and diverse. We have several significant high-quality transactions scheduled for the second half of this year and a number of high-yield issuers looking to raise capital. As a result, we expect revenue generation to improve modestly during the second half of 2023 with additional upside if there is increased demand for the high-yield offering. Moving to our equity brokerage business. We generated $50 million of revenues for the second quarter, down modestly from the first quarter. Equity markets experienced lower volatility which moderated volumes as well as our results. We traded 2.7 billion shares during the quarter on behalf of our clients, down 4% sequentially relative to a 9% decline in market volumes. Client research votes and affirmation of the quality and capabilities of our platform continued to increase, and we see opportunity for further market share gains in this business over time. However, with the expectation of reduced volatility in the near term, we expect our equity brokerage revenues in the second half of 2023 to be consistent with the first half. Moving to fixed income, market conditions continued to be challenging. The yield curve inversion grew steeper during the quarter keeping investors on the sidelines awaiting more clarity on when the Fed will end its interest rate tightening. For the second quarter of 2023, we generated revenues of $37 million, down compared to the first quarter. The breadth of our client relationship and product capabilities provided some level of resiliency to our results. Asset managers and public entity clients were active as they found relative value in the short end of the yield curve. Trading among our depository clients remained slow as they continue to focus on building liquidity and evaluating our capital and funding position. Advising clients on hedging strategies drove an increase in derivative activity, and we remain active assisting clients with loan sales. While we expect the near-term outlook to remain challenging, we anticipate more clarity on interest rates as the year progresses, which should provide a turning point to more constructive fixed income markets. Like our investment banking group, we remain focused on broadening our fixed income platform. Our recruiting pipeline is active, and we see opportunities to continue expanding our market reach. We believe we are well positioned to gain share and assist clients when market conditions improve. Now, I will turn the call over to Tim to review our financial results and provide an update on capital use.

Thanks, Deb. Before reviewing our non-GAAP financial results, let me highlight an item impacting our GAAP results this quarter. Consistent with all prior periods, our GAAP results include restructuring and integration costs related to acquisitions and/or headcount reductions. For the second quarter of 2023, our GAAP results include $4 million of restructuring expenses associated with headcount reductions as well as vacated leased office space related to our previous acquisitions. Now, let me turn to our adjusted non-GAAP financial results, which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. We generated net revenues of $277 million for the second quarter of 2023, down 4% from the sequential quarter and 20% from the second quarter of last year. Consistent with the first quarter of this year, market conditions during the second quarter remained difficult for most of our businesses. Corporate investment banking revenues were flat on a sequential basis and continued interest rate uncertainty has kept many of our fixed income and public finance clients on the sidelines. For the first half of 2023, net revenues totaled $567 million, down 20% year-over-year. That said, our diversified platform is generating solid operating results. We continue to manage the business to reflect current market conditions, while balancing our strategic objectives of growing the long-term earnings capacity of our platform. Turning to operating expenses and margins. Our compensation ratio for the second quarter of 2023 was 63.8%, slightly higher compared to both the sequential quarter and the second quarter of last year, driven by lower net revenues. For the first half of 2023, our compensation ratio was 63.6%. We continued to maintain our philosophy of managing compensation levels to be a balance of employee retention and investment opportunities, while delivering operating margins and shareholder returns. Based on our current outlook, we expect our compensation ratio to be around a year-to-date level for the remainder of the year. Non-compensation expenses for the second quarter of 2023, excluding reimbursed deal expenses, were $67 million, an increase of 12% on a sequential basis and 11% compared to the second quarter of last year, primarily due to the write-off of a receivable in our public finance business. On a year-to-date basis, excluding reimbursed deal costs, non-compensation expenses totaled $126 million or an average of $63 million per quarter. Looking ahead, we expect our non-compensation costs, excluding reimbursed deal expenses to be around $62 million per quarter, in line with previous guidance. During the second quarter of 2023, we generated operating income of $26 million and an operating margin of 9.5%. For the first half of 2023, operating income totaled $67 million and an operating margin of 11.9%. Our income tax rate was 18.2% for the second quarter of 2023 and 2.1% for the first half of the year. Income tax expense for the year-to-date period was reduced by $15 million of tax benefits related to restricted stock vestings. Excluding these benefits, our year-to-date tax rate was 25.3%. We expect our tax rate for the second half of 2023 to be within our range of 27% to 29%, excluding the impact from stock vestings. During the second quarter of 2023, we generated net income of $20 million and diluted EPS of $1.13. For the first half of this year, net income totaled $63 million and diluted EPS was $3.49. Let me finish with an update on capital allocation. We remain committed to returning capital to shareholders through market cycles. During the second quarter of 2023, we returned an aggregate of $16 million to shareholders, primarily through the quarterly dividend. For the first half, we returned an aggregate of $128 million to shareholders. On a year-to-date basis, we repurchased approximately 447,000 shares of our common stock, or $64 million which more than offset the share count dilution from this year's annual stock grants. We also paid an aggregate of $64 million, or $2.45 per share, to our shareholders through our quarterly and special cash dividends. In addition, today, the Board approved a quarterly cash dividend of $0.60 per share to be paid on September 8th to shareholders of record as of the close of business on August 25th. While our second quarter and year-to-date results reflect the continued challenging market conditions, we've made significant strides over the last few years to increase the long-term earnings power of our platform. Once markets open up, we believe we are in a position of strength to continue to realize the benefits of our expanded and diversified business. With that, we'll open up the call for questions.

Thank you. Our first question comes from Devin Ryan with JMP Securities. Your line is open. Please go ahead.

Hey, thanks. Good morning, everyone.

Hey, Devin.

Good morning.

Hey. Just want to start on the equity financing market. Obviously, you saw some improving results there, and I think healthcare showed some strength and that helped offset some of the softness in advisory. So, just wanted to maybe dig in a little bit around, what you're seeing the equity issuance environment, whether you're seeing activity kind of building outside of just healthcare? And then, the bigger picture is really you had a better quarter from the first quarter, but you're kind of just back to the second half of last year levels and then clearly far off of the 2021 record, which also wasn't normal. But just trying to get a sense of like how you guys think about what a normalization in that business line could look like for Piper, especially since you've been adding resources and bankers?

Yes, regarding the ECM question, it is definitely improving compared to the previous few quarters, but the overall fee pool in ECM remains significantly lower than the averages of the past four or five years. We've seen the improvement primarily in healthcare, although there have been some recent IPOs, including a restaurant IPO, and we completed a few financial services secondary deals. Typically, more than half of our activity has been in healthcare, and that trend continues, but we are gradually seeing diversification. While we expect some continued improvement, it's not at outstanding levels yet; it's simply an improvement from how poor it has been. In terms of overall revenue levels, we have noticed a recent uptick in our deal announcements, including significant depository transactions this week. We're seeing more announcements every few days, some of which will carry into Q3 and Q4. We anticipate that advisory will improve in the second half, but unlike the rapid recovery seen in 2020 post-COVID, this recovery feels more gradual. We're making progress in financing some of the sponsor deals, but the recovery is slow rather than rapid.

Okay. Terrific. Thanks, Chad. And then just a similar kind of framework for the advisory business. So, appreciate some of the commentary, it sounds like some of the early indicators of business there are improving. So, I'd love to just dig in a little bit around that and if you can provide more perspective around either anecdotally or quantifying what you're seeing around some of these early indicators. And really, is it a function of just deals that you've been mandated on and maybe people are feeling like, let's kind of start to move these forward at a faster pace or are you seeing kind of an uptick in new activity coming in or sponsors saying, okay, it's now been quite some time since we've done something, markets are more interesting now and so maybe the risk isn't as extreme. Like what is the tone? And then, this recovery in your mind, is it uneven where you have maybe the best assets trade and assets that are more cyclical or macro-centric just sit and so it's not a kind of a normal recovery in a sense of like everything is improving at the same time?

I would say that the recent larger deal announcements and fees we've made in the last few months that haven't yet closed give us insight into the second half of the year. In terms of our sponsor business, obtaining credit for larger deals has been quite challenging, and the credit markets aren't particularly strong. However, we are successfully putting together financing packages. Some seller expectations are aligning with this, allowing us to complete more transactions, especially in sectors like industrials and consumer, where there is a strong focus from sponsors. We've initiated several deals recently, but these typically take about six months to process. We'll see how many close. At the start, we're receiving numerous bids, but as we reach the end of the process, fewer buyers remain compared to a year or two ago. Nevertheless, we are managing to finalize more deals. There is financing available, and it's worth noting that certain sectors in the sponsor space are performing better than others, but overall, in industrials, healthcare, consumer, and energy, private equity activity is definitely increasing.

Okay, got it. That's great. And then, just if I can sneak one more in here for Tim. Just on the write-off of the receivable. I'm assuming that's just a complete one-off here with a one-off client to make sure understand that and make sure there is nothing else kind of to note there on the expenses? Thanks.

Yeah. Devin, you're thinking about that right. I mean, it's a specific client who had a pretty unique situation, we've determined we should write-off that receivable, so we've fully written that off, there is no more exposure there.

Okay, great. Good stuff. All right. Thank you. I'll leave it there. Thanks, guys.

Our next question comes from James Yaro with Goldman Sachs. Your line is open, sir. Please go ahead.

Good morning, and thank you so much for taking my questions.

Good morning.

Hey, James.

Hey, maybe just start with the muni finance business. I appreciate your comments, Deb, but maybe just thinking about the longer-term trajectory of that business. What's the timeline over which you think the business fully normalizes? And then, I guess, with higher terminal rates, is there any reason to expect it can't fully return to the previous revenue run rate?

Yeah. So, first of all, just thinking about the path here. It's a little hard to predict exactly, because one of the bigger drivers for us, for our business, is our specialty businesses, meaning the biggest driver of the improvement. And we need to see more inflows into high yield funds. And while that stabilizes here and there has been some modest inflows, it's less than 10% of the outflows that we saw last year. So, that's something to watch, I guess, I would say, as it relates to how soon the recovery comes in that business. And I would say, relative to your comment on overall rates and where those are, so the refinancing side of our public finance business, that obviously is impacted, and I would say as we move forward, you look back to the peak in 2021 that was driving part of it, so I would say we are focused on continuing to recruit and add to be able to build a business that's bigger than that, but you're accurate in that interest rates will impact the ability to get back to that sort of level.

Yeah. And I would just add. I mean, obviously, the vast majority of projects we're financing are eventually going to happen. And so, yeah, we will get back to the run rate. Some of the project finance, project development, real estate type stuff that is specific to can you get it financed with that package, that may be on the margin in a much higher rate environment more difficult, but most of the rest of the public finance stuff or projects that are happening, I mean, they are eventually going to happen.

Thank you for that clarification. Chad, I would like to ask you about the hiring competition. The large firms are reducing their hiring, and recent transactions have eliminated some publicly traded and independent competitors. I assume this provides more capacity in the market, while many of your independent competitors have described this as a prime hiring opportunity. How have these factors influenced your ability and the costs associated with recruiting new talent?

Certainly, over the past four or five months, we've been spending more time than ever engaging with candidates. When looking across successful platforms, the number is smaller, indicating there are specific locations where people prefer to work. However, just because someone expresses a desire to transition does not guarantee they will be a great hire. Thus, we are placing significant emphasis on quality amidst scrutiny in challenging markets to ensure that new hires can perform well, not just in favorable conditions. We are indeed seeing an increase in hiring, and what's intriguing is that the compensation packages are not as extreme as they were in 2021 during better times, making the situation more compelling. It's important to note that we have grown faster than most over the last few years. Consequently, while we are still expanding, we will do so at a measured pace. We do not need to hire extensively to achieve a significant increase because productivity levels are historically low. Therefore, we will continue to add staff steadily while maintaining a strong focus on quality and productivity, and we will manage out those who are underperforming or haven't met productivity expectations after a couple of challenging years.

That makes a lot of sense. I have one more question, somewhat unexpected. We recently saw the Basel III endgame proposal for major banks, and there's clearly a decreasing capacity for trading balance sheets in both the U.S. and Europe. The proposal announced yesterday for the U.S. was worse than anticipated. Given that there are not many independent full-service investment banks like yours, how does this additional regulation affect your ability to gain market share in some of your more balance sheet intensive businesses?

I’ll let Deb address the fixed income aspect. As for the regulatory side, I've mentioned before that while there was a lot of excitement about potential consolidation among depositories, progress has significantly slowed until there is more clarity. Recently, we announced a few significant transactions in the depository sector, and we are definitely seeing an increase in activity. Although the cycle for these transactions is lengthy, whether it builds slowly or accelerates early next year remains to be seen. What is clear is that the situation is challenging for everyone, but we are gaining market share in the depository area, which bodes well for us in the future. Now, I’ll turn it over to Deb to discuss some of the balance sheet regulations.

Yeah. And what I would say relative to the fixed income business, depositories are a large part of our business. It's actually the primary reason why we're seeing the softness in our fixed income results right now, because there is such a lack of clarity on interest rates, etc. So, as we think about our business, I would think about it much more as advisory in nature, working with banks across their asset and liability management. Right now, we're doing a lot of work with banks on helping them manage interest rates through our derivative product, creating liquidity by selling loans. So, it's not a use our balance sheet to drive business, it's much different and much more advisory based.

Okay. That's very clear. Thank you so much.

Thank you.

We'll go next to Steven Chubak with Wolfe Research. Your line is open. Please go ahead.

Good morning. This is Brendan O'Brien filling in for Steven. I guess, to start, I want to ask a bigger picture question. Last year, you outlined a target of growing the corporate and investment banking business to over $2 billion. At that time, you obviously were not anticipating the slowdown that we have endured. But at the same time, these types of environments do tend to offer better opportunities to both recruit and acquire new talent and platforms. I was hoping you could discuss some of the areas that you have been investing in and are looking to invest in further to hit this target, and whether there's any interest in doing a more meaningful acquisition in the current market, and maybe you could speak to your confidence in being able to hit that $2 billion number, I believe, it was by 2026?

Yes. What I would say is, I mean, when we did that, we had a lot of analysis, sort of, by industry team on what the opportunity was. And frankly, even in our two biggest sectors in healthcare, we've always been traditionally really good in med tech and biotech, and we thought services could be a third leg on the stool. We've continued to invest there. Absolutely still believe that, even in financial services where it's a very significant business and in the middle market, we're the leader. There was a huge opportunity for us in terms of outside of depositories and we've significantly done that, invested in our insurance business, asset management business, the real estate business. And so, we think that opportunity is significant. One of the biggest areas of opportunity was could we ever have a tech business that was the same size as financial services and healthcare. Obviously, we're undersized relative to some peers there, but that market certainly presents that opportunity, and we continue to invest in tech. Obviously, we did DBO. We talked about some of the products we weren't big in. Obviously, we did TRS in restructuring and frankly that's gone incredibly well, keeps growing, and eventually we'll get to the size and scale where it becomes counter-cyclical to some of the advisory businesses. And then, even our other teams, there's lots of white space. So, I would say, we still believe in that $2 billion banking target, it's still out there for us. Do I think it's going to happen for 2026? Obviously, that depends on the recovery. When we talked about this, we sort of said, it doesn't really matter if it happens in five years, seven years, eight years, but getting that sort of continued growth path is important to us. And then, I would say, relative to other transactions, what definitely is happening in the marketplace, I mean people have seen the success we had with valence in chemicals in the TRS team in restructuring and obviously what we did with Sandler and Simmons in energy. So, yes, we're getting lots of good looks, I would say the bigger deals get tougher because we don't like to do a lot of transactions that have a lot of people overlap, but the pace of things we're looking at and seeing is quite good, and I would also say we're starting to get to a zone where new boutiques or TMC aren't talking about 2021 results, there's sort of being more realism on sort of the current market and that will help us get something executed.

That's great information. Thank you. I want to shift topics and discuss the fixed income business, which faced another decline this quarter. It seems like the narrative has been one step forward and two steps back for the fixed income sector overall. In the past, you've indicated that activity tends to increase once there's less rate volatility, and it seems we are nearing the end of this rate hike cycle. I would like to understand how we should approach the outlook for this business moving forward. Also, Deb, you mentioned yield curve inversion and whether it needs to resolve before we see increased activity, or if there are other indicators we should monitor.

Yes, I agree that we seem to be approaching the end of the Fed rate cycle, but there remains some uncertainty that is causing low activity. As I mentioned earlier, the main challenges we're facing in the business have come from the depository space and their lack of activity. This leads us to consider when banks will be more active again. Regarding the yield curve, it doesn't need to revert to its previous state; rather, we need to have confidence that the Fed has finished its rate hikes and that rates will start to decrease. This would encourage more investment along the curve and in longer durations. Therefore, while the inversion doesn't need to disappear, we need to feel assured that we're nearing its end and that it will begin to shift in the opposite direction.

Yes. I wanted to mention that we've been asked about recruiting and investment banking. Since I became CEO, I've noticed a significant number of opportunities in fixed income, likely due to the challenging environment. Many are aware that we have a strong platform, particularly in areas like loan trading and non-agency trading, as well as our initiatives with credit unions. We've made some valuable additions, and outside of our activities in depositories, there are several areas of strength in the fixed income market. We recognize that this has been a tough year, especially when compared to the strong performance in 2021. However, we remain optimistic about the long-term market opportunities and our position within it, and we are indeed seeing excellent opportunities to bring in talent for fixed income.

That's great color. Thank you for taking my questions, guys.

Yes. Thanks.

We'll go next to Mike Grondahl with Northland Securities. Your line is open. Please go ahead.

Hey guys. Thanks. First question, I think I'm hearing advisory is having a better second half, but not a blowout. Capital financing is also kind of continuing to improve and continuing to build. Am I right in thinking hey, it's kind of steady recovery, low to modest, but you're not seeing anything more than that at this point, is that fair?

I think that's accurate. We definitely have deals in the market, and we need to see the close rate in advisory improve. Regarding the financing ECM business, we've been stable for three quarters now. In Q3, August tends to be lighter, and we also lose the first week of September due to Labor Day. Overall, the financing markets are functioning again, unlike the first half of last year when they were completely shut down. The question is whether we're seeing a broadening to consumer markets, but we haven't yet seen that extend to tech. There are some promising tech IPOs expected towards the end of the year that could boost the tech market. So, your assessment is correct. We're witnessing improvement and growing confidence in revenue growth, but it's not an immediate rebound like in 2020; rather, it's a gradual recovery.

Got it. And then my second question was just, which sectors are sort of facing the greatest challenges for you? And I think you kind of answered that with tech, maybe slowest to recover. Any others that stick out?

Yes. I would say that the two toughest by far is in financial services depositories. I mean, we were down significantly in Q2 in depositories even from end of last year and the beginning of this year. And then, yeah, relative to tech, we haven't seen much ECM activity in a long time, and that's a big business for us. And frankly, the M&A transactions in tech have been more difficult. Now, you're seeing a big rebound in some of the software multiples and valuations. So that will work itself out, but if I would have to pick two of our most difficult teams, it would be the depository half of financials and tech in general.

Got it. Maybe lastly, Chad and Tim, how are you guys feeling about the cost structure today?

I would say that we are closely monitoring our cost structure. We have implemented some small headcount reductions in areas where we are not seeing a recovery. However, we still have a few hundred more employees than we did in 2020, and current non-compensation costs are higher as well. We are being very cautious about new hires, monitoring attrition, and managing underperformance and productivity among some of our producers. We will continue to be vigilant in this area, especially since we might only see marginal revenue improvements in the next couple of quarters. It’s important for us to gain more leverage on our bottom line.

Fair enough, guys, Thank you.

Thank you. With no other questions holding, I will turn the conference back to Mr. Abraham for any additional or closing comments.

Okay. Thank you, operator and everyone that joined. We look forward to updating you on our third quarter results. Have a great day and weekend.

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.