Earnings Call Transcript - PJT Q1 2024

Operator, Operator

Good day, and welcome to the PJT Partners' First Quarter 2024 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.

Sharon Pearson, Head of Investor Relations

Thanks very much. Good morning, and welcome to the PJT Partners' first quarter 2024 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 hand 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' 2023 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, 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, everyone, and thank you for joining our earnings call. Earlier today, we reported first quarter revenues of $329 million, up 65%; adjusted pre-tax income of $55 million, up 81%; and adjusted EPS of $0.98, up 81% from year-ago levels. We had our second highest revenue quarter ever, reflecting strong performance in all of our businesses, as we benefited from continued momentum in restructuring, significantly improved results in PJT Park Hill, and strong performance in Strategic Advisory. While we report results quarterly, we measure our progress not in quarters, but in years. After a highly successful quarter, our focus remains on ending the year as a meaningfully stronger firm than when we began the year. A core element of that progress is the continued addition of highly talented professionals, with particular emphasis on filling out our Strategic Advisory footprint. The recruiting environment continues to be conducive to senior hiring. And we expect our hiring to remain elevated this year even if it does not match 2023's record recruiting. In the first quarter, we had our highest open market repurchases ever as we remain focused on offsetting dilution from these investments. After Helen takes you through our financial results, I will review our business performance and outlook in greater detail. Helen?

Helen Meates, CFO

Thank you, Paul. Good morning. Beginning with revenues. Total revenues for the quarter were $329 million, a record first quarter, up 65% year-over-year. Revenues were meaningfully higher across all businesses with the highest growth coming from restructuring. We had a number of transaction completions that met the criteria for revenues to be pulled forward in the first quarter, totaling $25 million. Excluding the impact of pull forwards in both periods, our revenue growth would have been 52%. 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, compensation expense. We accrued compensation expense of 69.5% of revenues for the first quarter compared with 69.8% for the full year 2023. This ratio represents our current best expectation for the full year 2024. Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was $45 million in the first quarter, up from $36 million in the first quarter last year. The higher expense was primarily driven by increases in occupancy costs, travel, and related expenses, as well as bad debt expense, which is included in other expenses. Despite the high year-over-year increase in first quarter non-comp expense, we continue to expect that our full year 2024 non-comp expense will grow at a similar rate to the growth rate we experienced in 2023. This growth will be primarily driven by an increase in our occupancy costs as well as increased travel and related expenses. Turning to adjusted pre-tax income. Our adjusted pre-tax income was $55 million in the first quarter compared with $30 million for the same period last year, and our adjusted pre-tax margin was 16.8% for the first quarter compared with 15.2% for the same period a year ago. The provision for taxes, as with prior quarters, we 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. Our effective tax rate was 22% for the first quarter, below our full year 2023 rate of 25.3%. The tax benefit relating to the delivery of vested shares during the first quarter was greater than last year's benefit. We take a full year view of that benefit, and we currently expect our full year effective tax rate to be around 22%. Our adjusted if-converted earnings were $0.98 per share for the first quarter compared with $0.54 per share in the first quarter last year. On the share count for the quarter, our weighted average share count was 43.7 million shares, up 5% versus a year ago. This increase primarily reflects the full share count impact of 1.3 million performance shares, which reached the price hurdles at the end of 2023. During the first quarter, we repurchased the equivalent of approximately 1.5 million shares, primarily through open market repurchases. In addition, we plan to exchange 116,000 partnership units for cash on May 9, 2024. And on the balance sheet, we ended the quarter with $236 million in cash, cash equivalents, and short-term investments and $408 million in net working capital, and we continue to have no funded debt outstanding. Finally, the Board has approved a dividend of $0.25 per share. The dividend will be paid on June 20, '24, to Class A common shareholders of record as of June 5.

Paul Taubman, Chairman and CEO

Thank you, Helen. Beginning with PJT Park Hill. Revenues in our PJT Park Hill business were up significantly quarter-on-quarter and year-over-year, driven by meaningful growth in Private Capital Solutions. GPs and LPs alike continued to be attracted to Private Capital Solutions as they seek to enhance liquidity, particularly given the current low levels of portfolio monetization. This combined with a more constructive environment to execute secondary transactions helped drive strong Q1 results in PJT Park Hill. On the primary side, the fundraising environment remains challenged, although somewhat improved from year-ago levels as higher equity valuations have served to bring alternatives allocations better into line for many LPs. Turning to restructuring. Our leading restructuring team continues to be extremely active in both liability management assignments as well as in-court restructurings. Revenues in our restructuring business were up sharply year-over-year, but up more modestly quarter-on-quarter, reflecting continued high levels of activity. We are in a multi-year cycle of elevated activity in liability management and in-court restructurings. In many instances, more favorable financing markets will prove insufficient to stimulate broader restructuring activity. With each passing day, it is clearer that rates will remain higher for longer, that increasing numbers of companies are being disrupted by technological innovation and changing consumer preferences, and that companies continue to contend with challenges to their business models that link back to the pandemic. While the near-term maturity wall has largely been addressed, another one looms in 2028. In this highly constructive restructuring environment, we expect our 2024 restructuring revenues to remain elevated and to approach last year's record performance. Turning to Strategic Advisory. In the first quarter, our Strategic Advisory business delivered strong revenue growth compared to the prior year. As we highlighted on our last earnings call, we began 2024 with a new record pre-announced pipeline, but in a typically low backlog of announced pending closed transactions. Our mandate count continues to grow and stands at record levels. Our announced pending close pipeline has also grown appreciably year-to-date. Given the momentum we see in our business, we expect it to continue to build as 2024 progresses. In 2023, announced global M&A volumes declined to levels not seen in a decade. Over the past several months, the pieces necessary for an M&A recovery have increasingly fallen into place, driven by stronger-than-expected economic prints, rising global equity valuations, a significant recovery in the debt and equity capital markets, and increasing pent-up demand for strategic assets following two years of sharply reduced transaction activity. Amid broad-based expectations for a sharp uptick in global M&A activity in 2024, annualized year-to-date activity is tracking only modestly ahead of 2023 levels. We expect to see a gradual increase in M&A activity until certain catalysts are in place, which should further propel activity, namely Central Bank rate clarity and election results in the U.S. and elsewhere. The highest strategic priority for our Strategic Advisory business is to ensure we are best positioned to capitalize on the multi-year M&A upturn that is ahead of us. The continued addition of senior talent is an important element of that positioning. To close, looking back, we delivered differentiated performance in 2022 and 2023 as we continue to invest in our franchise. As we look forward, we are equally committed to further investment to ensure that we are best positioned to capitalize on the future, regardless of market conditions. As before, we remain confident in our long-term growth prospects. And with that, we will now take your questions.

Operator, Operator

Our first question comes from Devin Ryan with Citizens JMP.

Devin Ryan, Analyst

First question, I want to take a moment to discuss the broader M&A market and PJT's position within it. I appreciate your comments on the outlook. Looking at the market overall, 2021 was the most recent active year we experienced, which was likely an above-average year. Specifically for PJT, I believe Strategic Advisory partners have increased by over 40% since then. I would like to understand how you would describe a more normalized environment for PJT's Strategic Advisory business. What kind of revenues or production should we expect from partners, or what other factors should we consider to understand how much larger this business is today compared to that time? The business has evolved significantly since we last had an active environment, so it's challenging for people to envision what normalized revenue potential could look like for PJT.

Paul Taubman, Chairman and CEO

Yes. Look, it's really hard to sort of pinpoint what we would look like in a normalized environment, but let's try and have a go at it. If right now we were to experience a 2021 market environment all over again, we would be far better positioned to capitalize on that upswing than we were in actuality in 2021. We're not expecting tomorrow to wake up and be back into 2021 M&A environment. But if we were, we would find ourselves able to deliver meaningfully greater performance because our coverage footprint is much greater today, because our coverage footprint better matches where the wallet is distributed, because we have less partially built-out industry verticals and more fully built-out industry verticals, and because our brand and years of sustained coverage are greater, and we're better known to clients today than we were three years ago. What we are focused on is where we believe the M&A market is going. And it's clear that 2022 and 2023 are aberrationally low levels of 'normalized M&A.' Early on, we said, this is not a light switch in 2024. Do not look at the light switch that got flipped from 2020 to 2021 and just see this explosive rebound in M&A from '23 to '24. We have always viewed it as more of a slow gradual rebuild. We made the point that two years of successive global declines in M&A volume, that we didn’t believe you'd see a third; when you do have an inflection point, you typically see first-year growth of 10% to 15% in volumes. I think year-to-date, we're tracking global annualized volume is up 8% or 9%. I expect that momentum will build a bit over the year. And I continue to believe we'll end up the year up 10% to 15% in global M&A volume. But I do think there's an opportunity for there to be a step-function change in that in '25 and beyond, and that's what we're playing for. And there's no doubt that in any environment you pick, Devin, our ability to capitalize on that is going to be fundamentally different today than it was three or four years ago. Hopefully, that's helpful.

Devin Ryan, Analyst

Yes. I appreciate that, Paul. And then just as a follow-up here on just the comp ratio, just trying to maybe dig in and square a little bit more between the 69.5% relative to the second best-ever revenue quarter. Obviously, thinking you have still higher than I think kind of historically where you've been at. And so just want to think about how much of that is maybe a function of seasonal dynamics like retirement-eligible expense or the competitive backdrop that you're seeing right now, or you obviously heard commentary around the desire to lean in again on recruiting? So just love to kind of think about that number, what that means, and then what the implication is on a go-forward basis, particularly in an environment where over the next couple of years revenues are potentially recovering.

Paul Taubman, Chairman and CEO

First of all, 69.5% is our current best estimate of the full year. That is marginally below full-year comp ratio for last year. What I said on the last earnings call is, in order to see meaningful comp leverage for the ratio to come down meaningfully, we need to see the revenue growth measured in years exceed the headcount growth. And you've made the point, and I think I said on the last earnings call that over the last three years we had added 35% headcount, but we haven't grown our revenues near 35%. I don't believe that day is far away. And when those two are aligned, that's when you're likely to see meaningful reductions in comp as a percentage of revenue. But we do remain very focused on keeping recruiting elevated. We do believe that the investments we're making are bearing significant fruit. But until all of those revenues are fully realized, the ratios are likely to be out of balance. And we're still uncertain as to what the true market compensation environment will be at the end of the year. So based on all of that, 69.5% is our current best estimate.

Operator, Operator

Our next question comes from James Yaro with Goldman Sachs.

James Yaro, Analyst

Maybe just starting with placement, which was excellent in the quarter. I know this can be one of the lower quarters from a seasonal perspective across the year for placement. There's obviously been a strong step-up in the business versus last year. So does that suggest that there could actually be substantial growth from here and we could keep the normal seasonal improvement over the course of the year in that business for '24?

Paul Taubman, Chairman and CEO

I always hesitate to try and reduce our business to 13-week earnings cycles as to what's going to fall into any cycle. So it's easier, James, for us to talk about it on a yearly basis. I think we've been pretty consistent that 2023 was an aberrationally difficult year in terms of total revenue results for PJT Park Hill. That the environment, while still far from perfect, has improved. And then if you just look at placement, which really is closer to primary capital raises but also encompasses things like corporate private placements and the like, I think there's no doubt that we're in a more favorable environment, and we all expect that to be an up year. But where it falls quarter-to-quarter, I'd rather refrain from speculating.

James Yaro, Analyst

Okay. That makes a lot of sense. Maybe just a longer-term question on the strong growth in secondary continuation funds that we're seeing across the industry, and I think you're benefiting from that as well. Maybe just your longer-term outlook on the businesses, the ability for the strong growth to be sustained, and then how they interplay with the lack of M&A and whether that's supporting some of the activity and growth that we've seen more recently?

Paul Taubman, Chairman and CEO

Yes, I believe there is a connection between the growth in secondary continuation funds and the challenges in monetizing investments in the current rate environment. This situation presents an opportunity for investors to create liquidity. However, I think the trend is driven by more than just this issue. There is a growing awareness of the value of continuation funds, which can be beneficial for sponsors who want to retain and manage high-quality assets. Selling those assets often entails higher transaction costs and disruptions, making it more appealing to create vehicles that allow certain limited partners to exit while others join. One challenge is that the demand from sponsors for continuation fund vehicles exceeds the available capital in this asset class. There is a strong argument to be made that investors are currently under-invested in this area. Recently, we've seen significant capital raised by leading sponsors to bolster available funds. As this capital continues to grow and more is funneled into secondaries and continuation funds, I foresee this as a long-term trend that we plan to take advantage of.

Operator, Operator

Our next question comes from Jim Mitchell with Seaport Global Securities.

James Mitchell, Analyst

Could you provide an update on the restructuring, Paul? We experienced record debt issuance in the first quarter. In light of this, there was a considerable amount of refinancing that may have alleviated several issues for this year. What gives you confidence that this will not continue and potentially create some challenges in the restructuring process? It seems we've encountered this situation before, where a surge in refinancing leads to a slowdown in restructuring. I would like to hear more about your confidence in maintaining the current levels of restructuring we are witnessing.

Paul Taubman, Chairman and CEO

There are two aspects to consider. One is whether we will set records each year or revert to the earnings patterns of 2020 to 2021. I've mentioned several times that the situation from 2020 to 2021 does not reflect the current environment. Therefore, I can't guarantee that every year will be a record year. However, I believe we will maintain high levels of liability management for an extended time due to several factors I've discussed. One reason is that interest rates are not decreasing as rapidly as many anticipated, which has an impact. There is significant disruption, many emerging success stories, yet there is also creative destruction; you can't have just winners without some losers. Some companies that were not on our radar five or ten years ago are now extremely disruptive. The trends of decarbonization, electrification, AI, and digitization are all very disruptive. This indicates that while we may have a strong economy, there will be businesses with models that no longer work. This situation is likely to worsen rather than improve. Additionally, we were correct in our long-term perspective but misjudged the short term when we talked about COVID causing lasting damage to many companies. The substantial fiscal and monetary stimulus at the end of 2020 and into 2021 masked many issues, allowing companies to persist but leaving them in a vulnerable state that they will eventually need to confront. We view this as a multi-year cycle, which can sustain high levels but may not achieve record levels each year. While we expect a significant multi-year M&A wave, that doesn't imply we foresee each year outpacing the previous one. If we look at historical default rates, we see that the current situation is the exception and not sustainable. We are indeed in a different environment, and it is a multi-year cycle.

James Mitchell, Analyst

No, that's helpful. Maybe just switching to buybacks and/or capital return. If we assume sort of activity, and therefore, profitability and cash flow are improving in the coming years. I'm not putting words in your mouth, but I guess that's the expectation for most people. How do you think about the priorities of that extra cash flow putting it to work? Is it first in net buybacks? Could we start to see net buybacks versus offsetting dilution, or is it a higher dividend? How do you think about a scenario where cash flow is growing pretty nicely?

Paul Taubman, Chairman and CEO

The main priority is investing in the business, whether through organic or inorganic means. This must be our top focus. In the first six years, we eventually recouped all of the incentive awards, and the performance awards we implemented were effective. Our goal is to regain everything, and we are committed to doing so. This quarter, we've effectively neutralized much of last year's typical issuance, and we'll achieve that by May 2nd if we haven't already. Moving forward, our primary goal will be to continue this momentum. While increasing the dividend is important, investing in the business takes precedence. However, that doesn’t mean we cannot pursue both objectives simultaneously. The key priorities are to invest in our core business and to ensure we are not diluting our valuable equity. I am confident that we can manage both wisely and at the right pace to grow the dividend, as that is our immediate focus.

Helen Meates, CFO

So just to confirm, to date, most of the repurchases have been to neutralize the issuances. So as Paul said, maybe in the future we take that further. But for now, that's where we are.

Operator, Operator

Our next question will come from Steven Chubak with Wolfe Research.

Brendan O'Brien, Analyst

This is Brendan O'Brien filling in for Steven. I guess, to start, I just want to talk a bit about the revenue outlook commentary you provided. I mean, if we put the pieces together with restructuring down modestly, Strategic Advisory likely to be up slightly depending on how the back half plays up and plays out, and Park Hill is expected to be up more meaningfully, it sounds like you're pointing to a similar level of revenue growth as you guys saw last year. Is that a fair interpretation of your comments?

Paul Taubman, Chairman and CEO

We can interpret my comments in many different ways, but let me be really precise. What we said was we currently expect our restructuring business to approach last year's record levels. We expect the Park Hill business to enjoy a very significant recovery from last year's levels. And I've talked about all of the puts and takes in Strategic Advisory, which is there's tremendous momentum. The mandate count continues to grow; it sits at record levels. We talked a quarter ago about record or near-record pre-announced pipeline. That pipeline continues to grow. We see the environment getting more constructive by the day. We talked about the one Achilles heel at the beginning of the year was a typically low announced pending close. That number has grown appreciably. We expect it will continue to grow. How that all works out with closings and the like, TBD.

Brendan O'Brien, Analyst

Got you. And I guess for my follow-up, I just wanted to touch on the election, which you called out as a potential catalyst. Last quarter, it sounded like the election had not yet been top of mind for clients. However, given we're just a few months away, I just want to get a sense as to what type of impact this is having on that maybe conversion from the pending or pre-announced to that pending close backlog?

Paul Taubman, Chairman and CEO

Yes. Look, again, I don't think it's a light switch that all of a sudden everyone is obsessing about the election. What we said early on is we think that that's a risk activity that's not well understood and not appreciated, but over time, it will be. I think you're starting to see more and more commentary that people are very much focused on the election. If you look at sort of the forward bets on volatility, they've increased appreciably as you get closer to the election. I think it's two things. I think companies that are thinking about transformative M&A that involves an interpretation of policy, enforcement at the FTC and the DOJ, I think this weighs on them. For a number of clients, they're going to wait and see the results of the election and then decide what their course of action is. And it could be that they were thinking of a larger target and now believe it's unlikely and they’re going to pivot to a different target or a different way to scratch the itch, or it could mean that the second term of the current administration might have a different focus on enforcement once you get past the re-election campaign, or it could mean that with a change in administration, we'll have a fundamentally different approach. So that is freezing some activity. I can't say it's freezing tremendous amounts, but there are pockets where that affects it, #1. #2, I believe that as we get a lot closer to the election, we are going to see a lot more volatility, a lot more uncertainty, a lot of dueling policy prescriptions which are going to create different sets of winners and losers, different proposed tax policies, regulatory policies, different approaches to China. And as a result, as we get closer, I think you're going to see activity dip as a result of that because of that volatility and because people are going to want to get through it. So it's going to manifest itself over time. It'll manifest itself in different ways depending upon what type of M&A you're looking at. But in the aggregate, I think when you get behind it, after we pass the elections, I believe all else being equal, we'll have more activity post-election than pre-election.

Operator, Operator

Our next question comes from Brennan Hawken with UBS.

Ben Rubin, Analyst

This is Ben Rubin filling in for Brennan. My first question is on restructuring. After a record year last year, it looks like you guys had another strong quarter this 1Q, and it seems like the commentary was quite bullish in that respect. I was wondering if you could just give me a sense of where your restructuring pipeline sits today? And you also spoke to record mandate counts within the Strategic Advisory practice. So I was just curious, how does that compare for the restructuring group? And then just lastly, any type of color you can provide around the overall contribution in terms of revenue that the restructuring practice had on this quarter's results would be helpful?

Helen Meates, CFO

I'll answer the last question first. We don't break out the contribution from each of the businesses. I think we've been pretty consistent on that. And then in terms of the pipeline, I think Paul's commentary about where we see the year ending up versus last year, as you can imagine, the pipeline was not consistent with it.

Ben Rubin, Analyst

And then for my follow-up just is on recruiting. Obviously, last year was a record year, and it sounds like it will stay elevated in terms of the pace of this year. And according to the slide deck, which I thought was interesting, there were actually several hires outside of Strategic Advisory. Could you speak to your latest expectations for the overall pace of recruiting this year? And will you continue to add senior-level talent in areas outside of Strategic Advisory?

Helen Meates, CFO

So I'll talk about the increase in the partner count, which we disclosed in our reports this morning. That does include promotions. So historically, the growth in partners in the businesses outside of Strategic Advisory has usually been from internal promotions. Within Advisory, it's a combination of internal promotions and new hiring. So when you see increases, you shouldn't assume that all of that comes from outside.

Operator, Operator

Thank you. That does conclude today's Q&A session. I will now turn the call back to Mr. Taubman for closing remarks.

Paul Taubman, Chairman and CEO

Well, thank you all for joining us this morning. We very much appreciate your interest and your support. And we look forward to reconvening after second quarter earnings are released. Thank you very much.