Earnings Call Transcript - PJT Q3 2023

Operator, Operator

Good day, and welcome to the PJT Partners Third Quarter 2023 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, ma'am.

Sharon Pearson, Head of Investor Relations

Thank you very much, Todd. Good morning, and welcome to the PJT Partners third quarter 2023 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' 2022 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. And thank you all for joining us this morning. Before we turn our attention to our financial results, please allow me to make a few comments. This month, the world has witnessed barbaric unspeakable acts perpetrated by a terrorist organization against civilians in Israel. We express our outrage against such acts, and we had our voice calling for the immediate release of those held hostage. We see the extraordinary suffering of innocent civilians in Israel and Gaza, and we are heartbroken. In an effort to do our part, PJT is committing funds to aid humanitarian relief efforts in Israel and Gaza. Now turning to our results, we continue to operate in a difficult environment as higher rates, tighter monetary conditions, increased economic uncertainty, and a fraught geopolitical landscape weigh on markets globally. These pressures continue to dampen capital formation and global M&A activity, with equity issuance levels and current M&A volumes down to levels comparable to a decade ago. In contrast, this year, the number of U.S. bankruptcy filings is tracking to levels not previously reached in more than a decade. Against this backdrop, our unique combination of businesses and collaborative team approach delivered superior outcomes for clients and outperformance for our firm. Our nine-month revenues grew 11% year-over-year, with a record of $825 million in revenues. After Helen takes you through our financial results, I will review our performance by business, provide more detail on our recruiting efforts and update our full-year outlook. Helen?

Helen Meates, Chief Financial Officer

Thank you, Paul. Good morning. Beginning with revenues, total revenues for the third quarter were $278 million, up 5% year-over-year. A significant increase in restructuring revenues more than offset continued weakness in PJT Park Hill and lower revenues in strategic advisory compared to a year ago. Total revenues that met the criteria to be pulled forward in the third quarter were approximately $5 million compared with approximately $3 million in the same period last year. For the nine months ended September 30, total revenues were $825 million as Paul mentioned, a record for the first nine months and an increase of 11% year-over-year. A significant increase in restructuring revenues more than offset a significant decline in PJT Park Hill and a modest decline in strategic advisory compared to a year ago levels. 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. We have continued to accrue adjusted compensation expense at 69.5% of revenues for the first nine months of the year. This ratio represents our current expectation for the full year 2023. Turning to adjusted non-compensation expense, total adjusted non-compensation expense was $41 million for the third quarter, up $4 million year-over-year, and $122 million for the nine months, up $13 million year-over-year. As a percentage of revenues, adjusted non-compensation expense was 14.8% for both the third quarter and nine-month periods. Adjusted non-compensation expense grew 12% in the first nine months of the year compared to the same period last year. We expect the full-year growth rate to be in line with that nine-month growth rate, with full-year increases driven by higher professional fees, higher occupancy costs, as well as increased travel and entertainment expense. We reported adjusted pretax income of $44 million for the first quarter and $130 million for the first nine months. Our adjusted pretax margin was 15.7% for both the third quarter and the nine-month periods, this compares to 20.3% and 21.4% for the three and nine-month periods last year. The provisions of taxes, as with the prior quarters, we presented our results as if all partnership units had been converted to shares and all of our income was taxed at corporate tax rates. Our effective tax rate for the first nine months of 2023 was 26.7%, and we expect this to be our effective tax rate for the full year. The adjusted earnings per share were $0.78 for the third quarter and $2.30 per share for the first nine months. On the share count, for the quarter our weighted average share count was 41.4 million shares, including the exchange of partnership units for cash. Our repurchases in the first nine months totaled approximately 2 million shares, slightly higher than a year ago levels. On the balance sheet, we ended the quarter with $355 million in cash, cash equivalents, and short-term investments, and $370 million in net working capital, and we have no funded debt outstanding. Finally, the board has approved a dividend of $0.25 per share. The dividend will be paid on December 20, 2023, to Class A common shareholders of record as of December 6. I'll turn back to Paul.

Paul Taubman, Chairman and CEO

Thank you, Helen. Beginning with restructuring. We're experiencing a wave of opportunity not seen in more than a decade, as many companies grapple with an increasing array of challenges, pressured business models, over-leveraged balance sheets, unfavorable credit markets, and higher financing costs. We continue to believe that this balance sheet repair cycle will persist for an extended period of time, as the pressure on business models becomes more broad-based and more companies are impacted by higher interest rates and more restrictive credit conditions. Consistent with this commentary, our world-class restructuring business continued its strong momentum and leadership position, with revenues for the three-month and nine-month periods up substantially compared to a year ago. Turning to PJT Park Hill, the fundraising environment for alternative investments remains extremely challenging, with the hangover from record 2021 fundraising continuing to constrain investor appetite for new commitments. Subdued IPO and M&A activity has further weighed on new fundraising activity due to the anemic pace of capital return. As a result, many new fundraisers are being scaled down and taking considerably longer to complete. Against this backdrop, our three-month and nine-month revenues in PJT Park Hill were down significantly year-on-year. Turning to strategic advisory. Notwithstanding the recent state of M&A activity, 2023 is shaping up to be the lowest level of deal-making in nearly a decade. When measured as a percentage of global GDP and global market capitalization, M&A activity is at unprecedented low levels. Our strategic advisory business is not immune to the slowdown with revenues down for both the three and nine-month periods. However, our business continues to perform well on a relative basis with revenue declines meaningfully less than declines in overall M&A activity. While it is always perilous to call the bottom of any market, we have the utmost confidence that market conditions will improve and that global M&A volumes will, in time, return to levels more in line with historical relationships to global GDP and global market capitalization. Our focus remains on ensuring that we are well positioned for the inevitable market recovery. To that end, we remain actively engaged with clients on a broad array of strategic topics. Our pipeline of mandates has steadily grown throughout the year and is meaningfully stronger today than it was at the beginning of the year. Turning to talent, we continue to expand our capabilities through the addition of high-quality talent. We previously communicated that this would be our most consequential hiring year ever, as the subdued M&A marketplace presents us with a unique opportunity to accelerate the pace of senior hiring. Year-to-date, we have hired 17 partners and MDs, strengthening our market position across many industry verticals, including consumer healthcare, industrials, infrastructure, and technology. We expect these elevated recruiting levels to continue into 2024. We remain steadfast in our focus on long-term shareholder value and view this recruiting momentum as an important driver of value creation. While we expect substantial returns from these recruiting efforts over the intermediate to long term, these investments will pressure margins in the near term. As we look ahead, we expect our full-year revenues to be the highest in our firm's history, notwithstanding extraordinarily volatile markets and significant macro headwinds. We remain confident that the businesses we continue to build and integrate position us to weather this challenging environment and to thrive as market conditions improve. Our diverse set of businesses enables us to provide clients with differentiated advice and reward shareholders with differentiated performance. And with that, we will now take your questions.

Operator, Operator

Thank you. The floor is now open for your questions. Our first question will come from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan, Analyst

Great morning, everyone. How are you guys?

Paul Taubman, Chairman and CEO

We are well, Devin. Thank you.

Devin Ryan, Analyst

I want to start on the restructuring business strength. Clearly, you're seeing a nice contribution year-to-date. And I think your restructuring results are kind of hitting earlier than some of your peers where we're tracking growing mandates, but then you haven't seen much uplift there so far. So I just want to get a sense of whether you feel like that's mix. I understand you have a leading business here, but just kind of why it's coming in earlier. And then, Paul, it does sound like you're still pretty bullish on the potential for this business and could remain structurally higher. So I'm just trying to think about whether that could actually mean growth for PJT from what are good levels or if we're just kind of in a higher baseline right now, and that just continues. Thanks.

Paul Taubman, Chairman and CEO

Well, there's no doubt we're in a higher for longer restructuring cycle. And we've talked about this for some time. I think there are many businesses that were substantially weakened as a result of COVID. There was an environment where companies that were over-leveraged had extraordinarily benign access to capital, seemingly low interest rates. None of those sorts of lifelines are available today. As we look at the dialogues that we're having, the mandates that we're winning, we have conviction that this balance sheet repair cycle is going to have legs. Now like any cycle, it has ebbs and flows, so every day is not just simply a pickup in activity, but we do believe, taking a step back that these elevated levels should continue for some period of time as access to capital becomes more difficult, as companies need to deal with near-term maturities, and as what we believe will be an economic slowdown continues to affect business models and business performance. So that's kind of where we see the world.

Devin Ryan, Analyst

Okay, great color, Thanks, Paul. And just a follow-up here, I guess on just expense ratio. So, revenues are up 11%, year-to-date, compensation expenses are up about 20% year-to-date. I know, it's not quite the scientific, but I don't know if it's possible just to break down on comp specifically, just how much of that growth is a function of just amortization from prior years versus all the recruiting and the most consequential year of hiring that's going to be this year, versus just how much is just inflation and competitive dynamics? Trying to think about that relationship? Thanks.

Helen Meates, Chief Financial Officer

Sure. I think there are a number of components to the current ratio debt and, as you mentioned. But we're sort of begin with what our outlook is for revenues. One significant factor is the senior-level hiring that we're doing that we've talked about, so that will obviously impact it. We also think about comp discipline around the existing population, the competitive backdrop. And then, as you mentioned, there is amortization from prior year's compensation that will be flowing through, as well. So all those factors are taken into account when we determine our best estimate for the ratio.

Paul Taubman, Chairman and CEO

I think, Devin, if you just look back over the last three years, we have a demonstrably stronger firm today than what we presented three years ago. We have meaningfully grown the headcount for operating in market environments for two of our three businesses that are extraordinarily subdued, relative to three years ago. So when you step back, and you look at the significant investment, the strengthening of the franchise, and the very significant reduction in available wallet in two of our three businesses, it's not a surprise that the compensation ratio has moved higher.

Devin Ryan, Analyst

Yeah, understood. Okay, I will leave it there. Thanks very much.

Paul Taubman, Chairman and CEO

Thank you, Devin. Thanks.

Operator, Operator

Thank you. Our next question will come from James Yaro with Goldman Sachs. Please go ahead.

James Yaro, Analyst

Good morning. And thank you for taking my questions. Paul, maybe we could just start with the macro backdrop and how is this impacting your business? We obviously have more geopolitical uncertainty as you've alluded to higher rates and obviously upcoming U.S. elections. So maybe you could just talk about what that means for the M&A inflection and perhaps the cadence or timeline for which we see a return to normalized levels of M&A.

Paul Taubman, Chairman and CEO

Look, we came into this year, James, with perhaps the most sober assessment of the M&A marketplace. And we assumed that this would be another down year in the market. I think, notwithstanding that it was probably dampened, it was lower levels, it was more difficult to affect transactions and even wait on the more bearish side had expected to see. And when you deconstruct it, it's many factors all moving in the negative direction with volatility and difficulty in agreeing on price. It's constrained financing in terms of the quantum of committed financing available. It's cost of financing, which makes it harder for buyers and sellers to agree. It's a very strong antitrust policy and enforcement from the administration, which whether they prevail or not, has a chilling effect on a number of deals because companies are not willing to subject themselves to that uncertainty. It's this continued drumbeat of whether or not we're going to head into a recession. It's difficulty controlling costs on every dimension; it has been more difficult to get transactions done. But what has been different in this cycle is that companies' desire to move forward with their strategic agendas remains essentially undeterred. That's sort of the betwixt in between where, as difficult as it is to get transactions done, companies' desires to manage their portfolio to gain core competencies to benefit from scale economies, and the like that remains unchallenged. And then if you add to that the difficult fundraising environment and alternatives, and a little bit of indigestion from all of the capital that was put out in 2021, sponsors have been meaningfully less active in the marketplace. I think the number of portfolio companies that would like to go public is building, so you have an awfully large backlog. It's unclear how many of those companies will ultimately get liquidity events in the relative near term. I think that also, in the ecosystem has an effect on how aggressive private equity firms are in putting capital out. If there's less confidence that there's a private equity bid for businesses, companies are perhaps more reluctant to initiate a sales process. So all of this feeds on itself. But as I said, inevitably, markets adjust. I think we're in the adjustment phase on many of these factors. I think we're a lot closer to getting out of the tunnel, but it's been a long, dark tunnel.

James Yaro, Analyst

Okay. That's really helpful perspective, Paul. And just as a follow-up, just on the hiring, you've obviously had tremendous success so far with that this year. Maybe you could just speak to whether you see the same opportunities for hiring today versus the, let's say, the beginning of this year, and what your expectations are for hiring into 2024?

Paul Taubman, Chairman and CEO

I think we've talked consistently about two impediments to attracting all of the talent in the previous two years. One was the anomalies of COVID, just being in a remote environment, not being able to create those personal connections; that was a unique period of time, and that significantly constrained hiring, and we're well past that, thankfully. The second is that in 2021, that headwind was linked to the extraordinary melt-up in M&A activity. Therefore, the friction costs for senior practitioners to leave firms and take long periods of time on gardening leave; those friction costs were extraordinarily high. What we now have is probably the best environment we've seen in a long time because the fundamental attractiveness of our firm continues to build. The level of dissatisfaction at many of the big banks continues to remain. People who have come to our firm have thrived and appreciate the unique culture and the way in which we can all come together to serve clients; that's better understood by those who are considering joining our firm. We're able to create those personal connections because we're all back in the office. The friction costs in the current environment are as low as they’ve been, arguably forever, because of the low levels of M&A activity. We don't have quotas; every addition to the firm is individual by individual; it's all from the bottom-up. It's not from the top-down. But without those macro impediments, the attractiveness of our firm as a destination for talent is better shining through. I certainly expect that momentum to continue in the fourth quarter into 2024, and at some point, we'll get back to a more normal cadence.

James Yaro, Analyst

That makes sense. Thanks a lot.

Paul Taubman, Chairman and CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Steven Chubak with Wolfe Research. Please go ahead.

Brian O'Brien, Analyst

Good morning. This is Brian O'Brien filling in for Steven. I guess to start, results were a bit stronger than maybe your commentary last quarter suggested. Based on the prepared remarks, it seems like that might have largely been on the restructuring side of the business. So I just wanted to get a sense as to whether this was simply a function of timing, meaning that deals that you expected to close in Q4 closed a bit earlier, or whether there's some meaningful pickup and underlying activity that you weren't expecting. If there was more timing related, should we be expecting to see that seasonal uplift in Q4 that you typically have?

Paul Taubman, Chairman and CEO

Well, I think our full year commentary is modestly more upbeat than it was a quarter ago. So that suggests not timing, per se, but just some additional strikes. In the firm, it's always hard to predict exactly how all of these mandates and all of these opportunities translate into revenues. But I would simply say that, as we've been in the field, competing for business and doing the business, and just seeing the macro environment and the opportunities presented to ourselves, I think our outlook for this year is marginally improved relative to a quarter ago. I don't believe it's a step-function improvement, but it is marginally improved. A lot of that is restructuring, but it's not exclusively restructuring.

Brian O'Brien, Analyst

Got it. That's helpful color. And I guess for my follow-up, I know you touched on this a bit, but we have seen a number of large strategic transactions announced over the past few months, which along with the positive news on the antitrust front, such as the approval of Activision and Microsoft suggests that the environment is relatively more favorable for large strategic transactions. But at the same time, some of the commentary from the large public audit suggests that activity at sponsors is likely to remain subdued in the near to intermediate term. Could you compare the dialogue that you're having with sponsors and strategics at the moment? And do you feel like the gap with higher long-end rates could serve as further pressure to seller and I guess for sponsor activity?

Paul Taubman, Chairman and CEO

I'm sorry, could you please repeat that last sentence? I didn't hear it.

Brian O'Brien, Analyst

The gap with higher long-end rates and the potential impact on sponsor activity?

Paul Taubman, Chairman and CEO

Look, I think it is clearly a mixed bag. I can sit here and I could take a picture and talk about green shoots and all the reasons to be optimistic. I could also talk about the reasons why that may not come to fruition. The reality is we're dealing with a very challenging environment to get transactions done. Let's just take antitrust; while there have been some well-publicized victories, the fact remains that this administration is still committed to active enforcement. As a result, it puts businesses at risk because of extended periods of time between signing and closing, and in a volatile macroeconomic backdrop, putting companies and targets in the crosshairs for longer periods of time, when they're not integrated and they're not yet acquired, and they're just sort of sitting out there, that has risk. It makes it more difficult for companies to get comfortable. So the mere fact that there is uncertainty, the mere fact that there are longer periods of time between signing and closing, the fact that there are more regulatory jurisdictions around the globe, with many different agendas, and opportunities for intermediaries to get caught up in a broader geopolitical test of wills, weighs on transactions. That doesn't mean it precludes all transactions; it just means that at the margin, some transactions that would otherwise be presented to the market as a great deal never see the light of day. I think there's no doubt that private equity firms are looking to create more monetization events with portfolio companies. As the IPO markets hopefully, open up a bit, one of the challenges will be just the sheer number of companies that would like to access the IPO market. That's why you're seeing greater interest and execution with fund continuation vehicles and the like as you look for ways to create more liquidity for companies. Committed financing continues to be challenging for very large transactions, but you're then seeing the growth in pools of private capital and direct lenders and more creative deal-making. We're adjusting to this environment. But what gives me the most confidence is the simple fact that no matter how difficult it is to get deals done, companies' desires to try and figure out a way to present deals and to move forward, and the fact that we have an ever-growing backlog of strategic initiatives that have not yet been able to be acted upon I think is an accelerant. As soon as some of these conditions, and some of these clouds start to lift, you could see a very strong movement activity to the upside. So we're controlling what we control, which is making sure we have the right team on the field, making sure we have the right culture to get our team aligned with clients, making sure we have the right priorities, and trying to secure as many high-quality mandates as possible. Even if we don't have as much as we'd like to present to our investors on a quarterly basis, we're at least positioning ourselves for the inevitable turn, and when it does, hopefully, that will be reflected in stronger results.

Brian O'Brien, Analyst

Thanks for taking my question.

Paul Taubman, Chairman and CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Brennan Hawken with UBS. Please go ahead. And Brennan, your line is live. Please unmute if you're muted.

Brennan Hawken, Analyst

Okay, sorry about that. Thanks for taking my questions. I wanted to start, Paul, with your expectation for the recruiting to continue to pressure margins. When you say that is that incremental pressure versus what you have been generating more recently, or is that more saying that the pressure that you've seen recently will continue? Just trying to understand the implication there?

Paul Taubman, Chairman and CEO

I think it's clear that current margins are lower than they have been historically. We aim to return to those historical margins. However, as we navigate a subdued environment and high recruiting costs, our ability to achieve those margins will be under pressure.

Brennan Hawken, Analyst

Okay, understood. I was trying to get a better sense of whether you're discussing something incremental. I guess I can assume it will be a bit incremental.

Paul Taubman, Chairman and CEO

Just to be clear, we need to get through this year and see where we land for the full year. But my hope would be that from there, we would begin to get those margins higher over time and get them back to where they had been historically; that's the objective, so there's no confusion.

Brennan Hawken, Analyst

Okay, thanks for taking my questions.

Paul Taubman, Chairman and CEO

Thank you.

Operator, Operator

I was just going to thank everyone for joining us today. We appreciate your interest. We appreciate your support. We look forward to communicating our full-year results early in 2024. Thank you very much. And this does concludes today's call. You may now disconnect.