Earnings Call Transcript - PJT Q3 2021

Operator, Operator

Good day, and welcome to the PJT Partners Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sharon Pearson, Head of Investor Relations. Please go ahead.

Sharon Pearson, Head of Investor Relations

Thanks very much. Good morning, and welcome to the PJT Partners third quarter 2021 earnings conference call. I'm Sharon Pearson, Head of Investor Relations at PJT Partners. And joining me today is Paul Taubman, our Chairman and Chief Executive Officer; and Helen Meates, our Chief Financial Officer. Before I turn the call over to Paul, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that these factors are described in the Risk Factors section contained in PJT Partners' 2020 Form 10-K, which is available on our website at pjtpartners.com. I want to remind you that the company assumes no duty to update any forward-looking statements. And that the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For detailed disclosures on these non-GAAP metrics and their GAAP reconciliations, you should refer to the financial data contained within the press release we issued this morning, which is also available on our website. And with that, I'll turn the call over to Paul.

Paul Taubman, Chairman and CEO

Thank you, Sharon. Good morning. Thank you all for joining us today. Before we review our quarterly results, I wanted to provide some high-level commentary about each of our businesses. This year, Strategic Advisory, PJT Park Hill, and PJT CamberView are all growing significantly and will deliver record performance. In restructuring, while we continue to be quite bullish on the long-term outlook, the extraordinarily benign credit markets and the unprecedented physical and monetary policy support have meaningfully dampened the current restructuring environment. Against that backdrop, our 2021 restructuring revenues will return to 2019 levels. As we discussed previously, last year's record third quarter restructuring results present us with particularly difficult comparisons. This quarter's restructuring results reflect a nearly $100 million step down in restructuring revenues relative to last year's record-setting performance. Also weighing on this quarter's total results is the fact that our second-half Strategic Advisory revenues will be heavily skewed towards the fourth quarter. After Helen presents our three and nine-month financial results, I will review each of our businesses in greater detail.

Helen Meates, CFO

Thank you, Paul. Good morning. Beginning with revenues, total revenues for the quarter were $231 million, down 22% year-over-year. Advisory revenues were $180 million, down 31% year-over-year. As Paul mentioned, while we experienced continued year-over-year growth in Strategic Advisory revenues, that growth was masked by the nearly $100 million decline in restructuring revenues from last year's record levels. Placement revenues were $47 million, up 48% year-over-year, driven by strong activity in fund placements. For the nine months ended September 30, total revenues were $679 million, down 7% year-over-year; advisory revenues were $530 million, down 13%. Similar to our third-quarter results, growth in Strategic Advisory revenues was more than offset by a decline in restructuring revenues. Placement revenues were $138 million, up 30% year-over-year, driven by higher fund placement fees. Turning to expenses, consistent with prior quarters, we've presented the expenses with certain non-GAAP adjustments which are more fully described in our 8-K. First, adjusted compensation expense; adjusted compensation expense continues to be accrued at 62.5%. We review our comp estimate every quarter, and 62.5% ratio represents our current best estimate for the compensation ratio for the full year. Turning to adjusted non-compensation expense, total adjusted non-compensation expense was $33 million for the third quarter and $93 million for the first nine months. Increased senior advisor costs, as well as increased expense relating to investments in IT and recruiting contributed to higher non-comp expense in both the third quarter and the nine-month periods. We also saw an increase in travel expense in the third quarter, but business-related travel activity is still tracking well below pre-COVID levels. Turning to adjusted pre-tax income, we reported adjusted pre-tax income of $54 million for the third quarter, and $161 million for the first nine months, with an adjusted pre-tax margin of 23.3% for the third quarter and 23.8% for the first nine months. The provision for taxes, as with prior quarters, we've presented our results as if all partnership units had been converted to shares, and that all of our income was taxed at a corporate tax rate. We also annualized the tax benefit relating to the delivery of vested shares during the first quarter of this year. We expect our effective tax rate for the full year to be 23%, which is just slightly above our previous estimate of 22.8%. Our adjusted earnings were $0.98 per share for the third quarter and $2.93 per share for the first nine months. For the quarter, our weighted average share count was 42 million shares. During the third quarter, we repurchased the equivalent of approximately 584,000 shares through the exchange of partnership units for cash, as well as through open market repurchases. And our repurchases for the first nine months totaled approximately 2.9 million shares, including the exchange of approximately 1.3 million partnership units for cash. We're currently in receipt of exchange notices for an additional 168,000 partnership units. And as we have done in the past, we will exchange these units for cash. On the balance sheet, we ended the quarter with $334 million in cash, cash equivalents, and short-term investments, and $229 million in net working capital. And we have no funded debt outstanding. Since quarter-end, we've paid the previously announced special dividend of $3.00 per share. For this quarter, the Board has approved a dividend of $0.05 per share, which is payable on December 22 to Class A common shareholders of record as of December 8. I'll now turn back to Paul.

Paul Taubman, Chairman and CEO

Thank you, Helen. Now, let me provide a bit more detail on our businesses and our outlook. Beginning with restructuring, given the extraordinarily benign credit backdrop, global default rates have returned to pre-COVID levels. And while we do not expect this market dynamic to persist for very long, it is the environment in which we currently operate. Over the medium to long term, we continue to expect the fallout from COVID-19 to trigger an extended period of elevated restructuring activity. The pandemic has inflicted damage on many companies with business models dislocated by changes in consumer behavior, as well as accelerated technological innovation. These challenges, combined with the sheer volume of debt outstanding, will, over time, result in significantly increased demand for our restructuring services. We're already starting to see early signs of stress building in the system, and we are engaging with clients around supply chain disruptions, rising labor costs, rising commodity prices, and inflationary expectations that are beginning to build. Our market-leading franchise remains well-positioned for when the environment turns, as it will, and we continue to invest in the business. Turning to PJT Park Hill, this year, our PJT Park Hill business is delivering record performance and is benefiting from strong secular growth trends taking place in the alternative asset investment market. On a macro basis, managers are deploying capital at unprecedented rates, and as a consequence many are raising follow-on funds more quickly and in larger size. In this environment, our focus on best-in-class managers with differentiated fund strategies is a significant competitive advantage. As our market-leading PJT Park Hill franchise becomes even more aligned with our Strategic Advisory business, we are increasingly positioned to take advantage of expanded opportunities with financial sponsors and other asset managers. Our business momentum is strong. And looking ahead, we see additional opportunities to gain share. Turning to Strategic Advisory, in Strategic Advisory, following a very strong 2020, where our growth rates were well ahead of market benchmarks, we entered 2021 with a record number of mandates, but with fewer transactions that had been announced and were awaiting closing. Since then, we have seen a steady increase in our mandate count, up nearly 30% through the nine months. And the pace of announced transactions measured by dollar value in number is tracking well ahead of last year's levels. We expect our momentum in Strategic Advisory to translate into significantly greater strategic advisory revenues in the fourth quarter, and set us up well for next year. PJT CamberView is also tracking to deliver record performance in 2021, and will enter 2022 with a record backlog. Overall, PJT CamberView is benefiting from its strong positioning in strategic IR, ESG, and shareholder activism. Looking ahead, we are poised to enter 2022 with a demonstrably stronger and more powerful firm than we began 2021, and we remain extremely confident in our future growth prospects. With that, we will now take your questions.

Operator, Operator

Our first question today comes from Devin Ryan of JMP Securities.

Devin Ryan, Analyst

Great. Good morning, everyone.

Paul Taubman, Chairman and CEO

Good morning, Devin. Good morning.

Devin Ryan, Analyst

I want to start with a question on the outlook for Strategic Advisory. And looking at the presentation, a quarter of the Strategic Advisory partners still have not been on the platform for two years, so there's still I think some maturing on PJT's platform. Can you maybe talk a little bit about the production of that cohort relative to the other 75% that have been on the platform for more than two years? And just how production tends to ramp here, so we had seen that we're heading into 2022 with some productivity gains on kind of the younger cohort, but if there's any other context you can give us would be helpful.

Paul Taubman, Chairman and CEO

I mean, I think all of our partners are showing increased productivity, because it's not just whether you've been here for less than two years or more than two years, it's clear that our partners are taking a long-term view, they're investing in places where there's a long-term opportunity to not only build a differentiated relationship, but to generate outsized economic opportunities for our firm. And that means not to chase necessarily what's right in front of you, but to aim high in the steering wheel, and to look down the road, and to make sure that you're building the long-term, trusted relationships, and if you do that, inevitably, your business ramps with a long-term perspective. That would be the first point. And I think that's true of partners who are on for less than two years, and partners who were on for more than two years. The second thing is, in some of these verticals, as we have begun to enter these verticals, every incremental partner that is added brings a disproportionate productivity gain to the overall franchise, because sometimes it's the third partner in a sector where it all comes together. And it's not that the third partner was the most productive, it's that you needed to get to an efficient scale to do this. And then what's also clear is, everywhere we compete we're better known, there's more experience, there's more connectivity, more prior experience with board members, executives, and the like. So, I think we're very much in the early innings of getting the full productivity ramp from all of our partners. And the reason why, just to remind everyone. We always talked about pre and post two years is, unless you are incredibly fortunate that the revenue, given just the lead times to get a mandate and for mandates to lead to announcements and announcements to turn to closings, there's just a time lag where we don't expect much, if any, revenue in the first two years; that doesn't mean that we magically have a fully mature partner when they're two years and one month. And I see tremendous productivity gains across the field. So, that's how we think about it, Devin.

Devin Ryan, Analyst

Okay, thank you, Paul, very helpful. Just a follow-up here on capital return and, I guess, the outlook there. Obviously, now that you've paid out the $3.00 special, and as we think about kind of the next chapter, if you will, for PJT. Clearly the firm is generating substantially more excess capital beyond paying the dividend. So, how are you guys thinking about priorities at the moment? And are there any areas that feel more attractive? And should we be thinking about maybe more special dividends or greater buybacks, or how should we be thinking about capital return priorities?

Paul Taubman, Chairman and CEO

Well, we're still big believers in our franchise and in the value proposition. So, you should expect us to continue to be aggressive repurchasers of share and share equivalents. One of the reasons why all of that aggressive share repurchase hasn't translated into reduced share count is because, over the last six years, a lot of the earn-outs have been triggered. And on a going-forward basis, you won't have that to the same extent. So, we're actually going to most likely end up with reduced share count, not just maintaining share count. I think that's probably going to be our focus. But we do, at some point, need to figure out, as a companion, whether we want to increase the dividend on an ordinary basis or as periodic specials. And I think it's probably a bit early to make that decision. But at some point we'll probably have a fork in the road, we'll head one place or the other. And I think we'll be informed by some of the conversations we've begun to have in engaging with our own shareholders. But I would not want to suggest that our principal capital return is going to deviate from the investment that we feel most confident, which is repurchasing our own shares.

Devin Ryan, Analyst

Great, terrific, hold it there. Thank you very much.

Paul Taubman, Chairman and CEO

Thank you, Devin.

Richard Ramsden, Analyst

Hey, good morning, guys. So, perhaps I can just start off with a bigger-picture question, which is, I know, Paul, since you last spoke, inflation expectations have picked up a lot, the market's expectations for interest rates also moved up a lot, both at the short and the long end of the curve. As you think through both the positives and negatives of higher rates, could you just talk about how you think it impacts each of your constituent businesses as we head into 2022?

Paul Taubman, Chairman and CEO

I believe that rising interest rates will likely lead to a more favorable environment for restructuring. The capital markets have been very receptive, with many investors seeking yield, which has pushed them to take on more risk. However, this situation may not be sustainable in the long run. Many companies have struggled due to the events of the past couple of years but have managed to delay significant changes due to favorable credit conditions. These low rates have fostered a risk-oriented approach in equity markets, which has extended the time before restructuring becomes necessary. Over time, I expect a tipping point will be reached where many companies will find it difficult to refinance or will not get favorable terms. The trigger for restructuring often comes from a major shift, whether from foreign exchange fluctuations, changes in interest rates, or unexpected movements in inflation. If things proceed as planned, most companies can manage their strategies successfully. Real restructuring activity typically requires disruptions, which I believe are beginning to form. In our other businesses, some may remain relatively unaffected by these changes. For example, in Park Hill, the range of products and strategies we offer will evolve with the macro environment, but I don't expect a major impact on our overall momentum. We will likely adjust our focus based on investor demand and the strategies we pursue. As complexity increases and the importance of ESG and engagement with shareholders rises, our CamberView business may benefit. On the Strategic Advisory side, while I don't see significant changes to the overall trend of higher M&A activity, there is always a point where marketplace disruptions can introduce challenges. However, as we continue to grow our Strategic Advisory franchise, our growth will largely depend on specific factors rather than broad market trends. This is why we have been able to show consistent growth, even in years when others have faced difficulties. For now, our position is more about micro factors than macro trends. If our M&A business continues to expand significantly, we may eventually align more closely with broader market dynamics, at which point we will need to pay closer attention to macroeconomic trends. But for now, we remain focused on our specific strategies.

Richard Ramsden, Analyst

Okay, that's very helpful. And then perhaps can I just ask a follow up on restructuring and I know that you said that your anticipation is that that business is going to run at closer to the 2019 level. But if you look at where you are in Q3 and perhaps your expectations for the second half of this year, are we materially below the 2019 run rate? And is it your expectation that it's going to stay there at least in the near-term? Thanks.

Paul Taubman, Chairman and CEO

I'm loath to say it can't go any lower, but I think we're reasonably confident that we'll end the year pretty much on top of 2019 levels. And from there I view us having essentially de-risked the business. Now that doesn't mean it couldn't go a little bit lower, but if we were to get any headwinds in that business, it would be a fraction of the winds that have been blowing in our face in 2021. So whether it's the absolute bottom, whether it could go a little bit lower, that's much less of a concern, but the quantum of any potential further decline in restructuring is a fraction of what we've experienced this year.

Richard Ramsden, Analyst

Okay. That's very helpful. Thanks a lot Paul.

Operator, Operator

Our next question today comes from Steven Chubak of Wolfe Research.

Steven Chubak, Analyst

Hi, good morning.

Paul Taubman, Chairman and CEO

Good morning, Steve. How are you doing?

Steven Chubak, Analyst

Yes, I'm doing okay. Thanks.

Paul Taubman, Chairman and CEO

Great.

Steven Chubak, Analyst

Paul, I just wanted to unpack some of the commentary that you just conveyed around like the 30% increase in mandates on the M&A side, coupled with the fact that their restructuring business has been largely de-risked. I was hoping you could frame what the growth expectation is in 2022 versus 2021. Their confidence at the revenue growth should be materially better recognizing that 2020 was a year of particular strength for you guys, 2021 maybe representing a little bit more of a transition year as we start to lap some of these tougher restructuring comps.

Paul Taubman, Chairman and CEO

The best way to explain our consolidated rate of growth this year is to break it down according to our four businesses. It doesn't accurately represent any individual business, as it reflects the weighted average of all four. Three of the businesses are growing at healthy rates, while one is facing significant challenges. When you combine these factors, you arrive at a weighted average. The consolidated figures do not reveal the strong momentum we're seeing in our Strategic Advisory business, particularly excluding PJT Camberview, as well as the momentum in PJT Camberview and PJT Park Hill. Therefore, the consolidated number merely aggregates the performance of four businesses, three of which are experiencing robust growth, while one has seen considerable declines, with nearly $100 million dropped just in the third quarter. Looking ahead to 2022, we anticipate that the momentum in those three businesses will persist and likely continue beyond that. I am uncertain about what the restructuring environment will hold next year, but it is expected to shift from a significant headwind to a more neutral situation. This change will greatly affect the weighted average compared to 2021. It’s important to recognize that we have a leading restructuring practice that has successfully secured numerous mandates. Although we're currently navigating the macroeconomic challenges, the market is bound to improve, and when it does, we will be even stronger. Each day we expand our Strategic Advisory capabilities enhances our restructuring team's ability to succeed when the market rebounds. While I maintain a neutral outlook for the 2022 restructuring environment, I do not see this environment or what we experienced in 2021 as indicative of the trends we can expect over the coming years, as an uptick is inevitable, positioning us exceptionally well to capitalize on it.

Steven Chubak, Analyst

Now, that's really helpful color, Paul. And maybe just from my follow up, let's just call this a tough, but fair question. I think one of the concerns that we've been hearing from folks is that you posted the best results of any firm that we track in 2020. 2021, it's been a little bit more tepid. And the expectation is that some of the tailwinds that we've seen in 2021, whether it's European M&A sponsor activity, there are other competitors that are more indexed to some of those areas and you guys are stronger, whether it would be restructuring or large cap M&A, where activity is supposed to remain a little bit more tepid or lukewarm. And I was hoping you could just speak to where those concerns might be misguided from your point of view? And just how you believe you're positioned relative to peers competitively heading into next year and beyond?

Paul Taubman, Chairman and CEO

I view our situation from a micro perspective rather than a macro one. Despite our growth in headcount, revenues, and market presence, we see ourselves as still in the early stages. For context, our headcount in Strategic Advisory has quietly increased by 20% in the first nine months of this year. We are maintaining significant growth. While we don't report our Strategic Advisory M&A revenues separately, during the pandemic years of 2020 and 2021, we nearly doubled our Strategic Advisory revenues, which stands up against any competitor. However, we are not yet present in every industry or geography, and we still have a lot of room for development. Our growth is driven by the people we have, focusing on building client relationships one at a time, which means I don’t concentrate much on market trends. We don’t set our strategy based on market predictions; instead, we work closely with each banker and client to foster relationships. By prioritizing becoming a trusted advisor and securing mandates, we believe that eventually, positive outcomes will follow. This focus on mandate count helps us understand how many clients have chosen us as their trusted advisor. I don't believe we need to keep an eye on what others are doing. What I do recognize is that we are just beginning our journey. We have significant growth this year, despite facing considerable restructuring challenges. Once those challenges ease, the earnings potential of our other businesses will become clearer. Over the past six years, we have consistently worked on expanding our franchise, though the impact on the bottom line has varied. That encapsulates who we are.

Steven Chubak, Analyst

Now, that's really helpful, Paul. I appreciate you sharing those insights. And just one final one from me, maybe you acknowledged that the restructuring environment remains quite tepid. The one area or region, I should say, where activity is picking up meaningfully is China. I just wanted to understand in terms of your global footprint, how you're positioned at least to participate in some of those revenue opportunities that are starting to manifest?

Paul Taubman, Chairman and CEO

Right. We do not talk about client mandates that we have, but we are very focused on the region. We have a footprint there. We have very senior connectivity. We have a restructuring team that has done a lot in the Asia region. And you should assume that we're quite mindful of the opportunities.

Steven Chubak, Analyst

Right. Thanks so much for taking my questions.

Paul Taubman, Chairman and CEO

Absolutely, Steve.

Operator, Operator

As there are no further questions, I'd like to hand the call over to Paul Taubman for closing remarks.

Paul Taubman, Chairman and CEO

I think this concludes our third quarter earnings review. We appreciate all of your interest. And we look forward to speaking to you when we report full-year results in early 2022. Thank you.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.