Earnings Call Transcript - PJT Q1 2022

Operator, Operator

Good day, everyone, and welcome to the PJT Partners First Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Sharon Pearson, Head of Investor Relations. Please go ahead, ma'am.

Sharon Pearson, Head of Investor Relations

Thank you very much, Alan. Good morning and welcome to the PJT Partners first quarter 2022 Earnings Conference Call. 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 2021 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 the 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, and thank you all for joining us this morning. Earlier today, we reported our Q1 financial results. For the quarter, we generated revenues of $246 million, adjusted pre-tax income of $56 million and adjusted earnings per share of $1.00. Measured against each of these metrics, we had our strongest first quarter ever with broad-based strength across our businesses. Our PJT Park Hill and restructuring businesses delivered significant year-over-year growth in revenues, with strategic advisory revenues down just slightly compared to strong year ago levels. As we mentioned on our fourth quarter earnings, we expect the strong momentum we are seeing in our strategic advisory business to increasingly shine through as the year progresses. After Helen reviews our financial results, I will review each of our businesses in greater detail. Helen?

Helen Meates, CFO

Thank you, Paul. Good morning. Beginning with revenues, total revenues for the quarter were 246 million, up 19% year-over-year. And as Paul mentioned, we had significant revenue increases in PJT Park Hill and restructuring and a slight decline in strategic advisory revenues. Turning to expenses. Consistent with prior quarters, we've presented the expenses with certain non-GAAP adjustments and these adjustments are more fully described in our 8-K. First, adjusted compensation expense. We accrued adjusted compensation expense at 63% of revenues for the first quarter, which is flat. This is a full year 2021 ratio and represents our current best expectation for the full year 2022 ratio. Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was 55 million in the first quarter, up from 28 million in the same period last year. As a percentage of revenues, our non-compensation expense was 14.2% for the first quarter, up from 13.5% in the same period last year. We saw a meaningful increase in travel and related activity in March, although activity remains below pre-COVID levels. Not surprisingly, traveling-related costs were the most significant driver of our higher non-compensation expense in the quarter of 4.5 million compared with 500,000 in the prior year. Excluding traveling-related expenses, our non-comp expenses in the first quarter were up 11% year-over-year. With further growth in headcount, continued investment in IT and increased business activity, we continue to expect our full-year non-compensation expenses, excluding traveling-related, to grow in aggregate in the low double-digit percentages year-over-year. In terms of our traveling-related expense, those numbers are likely to grow as the year progresses. Turning to adjusted pre-tax income. We reported adjusted pre-tax income of 56 million for the first quarter, up 13% year-over-year. And our adjusted pre-tax margin was 22.8% for the first quarter compared with 24% for the same period last year. 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 the corporate tax rate. Our effective tax rate was 25.8% for the first quarter compared with 22.3% for full year 2021. We had a lower tax benefit relating to the delivery of vested shares relative to their amortized costs compared to last year. We take a full year view of that benefit and would expect our full-year effective tax rate to be in line with the first quarter rate of 25.8%. Earnings per share. Our adjusted-if-converted earnings were $1.00 per share for the first quarter, up 12% compared with $0.89 per share in the first quarter last year. For the share count, for the quarter, our weighted average share count was 41.8 million shares. During the first quarter, we repurchased the equivalent of approximately 1.2 million shares, including approximately 887,000 shares in the open market. The balance of the repurchases came from the exchange of partnership units for cash and the net share settlement of employee tax obligations. In addition, we plan to exchange 65,000 partnership units for cash on May 3, 2022. On the balance sheet, we ended the quarter with 96 million in cash, cash equivalents and short-term investments, and 218 million in net working capital. We had a modest draw on our revolver in the quarter, which has now been repaid. The Board has approved a new authorization of $200 million for the company's common stock repurchase program in addition to the $17 million left in our prior share repurchase authorization. And finally, the Board has approved a dividend of $0.25 per share. The dividend will be paid on June 22, 2022, to Class A common shareholders of record as of June 8. And with that, I'll turn it back to Paul.

Paul Taubman, Chairman and CEO

Thank you, Helen. Beginning with PJT Park Hill. Our PJT Park Hill business delivered strong performance in the first quarter compared to the prior year and continues to track toward another year of record performance. 2022 is shaping up to be an extremely busy but challenging year for alternative fundraising. Many managers are back out fundraising with record-setting fund size targets. In this increasingly crowded marketplace, some managers may struggle to meet their fund size targets as asset allocators become increasingly selective and capital constrained. Despite this challenging backdrop, we are well positioned to continue our strong performance. On the fundraising side, the team's rigorous selection process enables us to bring the highest quality fund managers with differentiated strategies and differentiated track records to investors. In secondary advisory, our leadership position advising on large complex GP-led transactions, coupled with our deep network of LP relationships, allows us to facilitate the institutional investors’ increased demand for capital redeployment and liquidity. Turning to strategic advisory. Given the early stages of our advisory build-out, we are disproportionately levered to the number of new client relationships developed rather than the level of overall M&A activity. Our ability to cultivate new banking relationships is greatly enhanced when we meet clients in person where our collaborative culture and differentiated capabilities can best be appreciated rather than over Zoom. To that end, our strategic advisory business is benefiting greatly from the resumption of travel, in-person meetings, and more personal client engagement. Our strategic advisory practice also continues to benefit from the contribution of PJT Camberview's unique investor-focused perspectives. As these two disciplines continue to evolve, the depth of our client relationships strengthens appreciably. As previously communicated, we have consistently forecast 2022's global M&A volumes to decline relative to 2021 levels. However, we remain confident that 2022 will be another record year for our strategic advisory business as the momentum in our increased client dialogues, mandates, and announced transactions is increasingly reflected in our financial results as the year progresses. Turning to restructuring. Although we continue to expect overall 2022 restructuring activity levels to be largely in line with 2021, stress is beginning to build in the system. The combination of increasing interest rates, inflationary pressures, and supply chain issues are having an impact on many companies that emerged from the COVID-19 pandemic with highly leveraged capital structures. Further disruptions caused by the war in Ukraine are impacting companies everywhere, but particularly in Europe. We continue to believe that it is simply a matter of time before we see a meaningful uptick in overall restructuring activity. Our restructuring practice continues to be a market leader receiving numerous accolades for its best-in-class capabilities, including being named Global Restructuring Bank of the Year by IFR for the second year in a row. Not yet ready to suggest we are at an inflection point, we have seen some uplift in PJT's number of restructuring mandates. Accordingly, we now believe that our 2022 restructuring revenues will increase slightly from 2021 levels. Turning to our capital priority. Our first investment priority continues to be attracting and developing best-in-class talent. Even with the challenges of recruiting in a COVID environment, both strategic advisory partner and non-partner headcounts grew at double-digit rates over the past 12 months. Offsetting the share dilution resulting from our human capital investments remains a close second in terms of capital priorities. At recent trading levels, the compelling investment opportunity in our shares caused us to weigh our 2022 open market share repurchases to earlier in the year. We committed more dollars to open market repurchases last quarter than in any previous quarter. As a result of our significant open market repurchases, we have as of today only $17 million left on our previous share repurchase authorization. Consequently, the Board has approved an additional share repurchase authorization of $200 million. As before, we intend to remain active in repurchases of our shares, but that activity is likely to slow in the second half of the year as we continue to be mindful of our float. Looking ahead, we said earlier this year that all of our businesses outside of restructuring were poised for record performance in 2022. That continues to be the case. And our leading restructuring franchise continues to be well positioned for when the inevitable restructuring wave hits. Our unique combination of businesses and the significant expansion opportunities that lie ahead position us well to drive significant growth. We remain confident in our prospects for 2022 and the years to follow. And with that, we will now take your questions.

Operator, Operator

Thank you, sir. We'll take our first question from Devin Ryan with JMP Securities.

Devin Ryan, Analyst

Thanks. Good morning, everyone. How are you?

Paul Taubman, Chairman and CEO

Good morning, Devin. We are fine, thank you.

Devin Ryan, Analyst

Great. First question just on kind of the broader outlook. So I appreciate all the guidance across all the different businesses. It sounded pretty similar to the commentary you guys gave on the fourth quarter call. Clearly, the macro backdrop has been pretty choppy since the Ukraine escalation. So there's been a number of shifts in the backdrop. So I'm just curious, are you seeing kind of a change in mix of activity in advisory as an example? Are the sectors that are outperforming, is there a shift there that's kind of giving you comfort in that outlook, or anything else you can kind of provide around in more on the strategic advisory side that gives you comfort that there should be a year of solid growth against a pretty volatile backdrop with a lot of uncertainty?

Paul Taubman, Chairman and CEO

I appreciate the question. I'd say three months ago, we communicated a view of 2022 which had already baked into it an assumption that the world was going to become more complex, markets more volatile, and the macro environment more challenging. I would say that overall since then, the world is probably a bit more unsettled than we had previously thought. And our view on our full-year prospects is equal to, if not slightly more constructive than it was at the beginning of the year. And I think that that's really across the board constrained, but a lot of that is that our advisory business is by and large decoupled from the macro environment. Clearly at some point if M&A activity shuts down, it shuts down completely. But if it doesn't shut down, it's much more for us a function of relationships, connectivity, the benefit of previous investment, being able to further support our businesses. And we're seeing that strength across the board. And of all of the expense variances, the one that I really enjoy seeing is a travel variance because the more that people are out on planes, trains, and automobiles seeing clients engaging that is good for our business. And I think we have benefited from that.

Devin Ryan, Analyst

Yes. Okay, terrific. And then just to follow up on the restructuring side of the business. Obviously, caught the commentary around kind of a slight increase is the expectation now. I think the markets kind of thinking about just what an abrupt normalization in Fed policy means for obviously the macro backdrop and the big picture question. But just thinking about just at a high level what that could mean for restructuring activity. And any early anecdotes, I appreciate you probably don't want to get too far out of your skis, and then restructuring revenues do take time to materialize. So it might even be more of a 2023 story if restructuring starts to pick up. But the view on rates has changed in the market in recent months. And so is that the bigger driver or is it just more a function of you starting to see some stress in pockets, some color there would be helpful? Thanks.

Paul Taubman, Chairman and CEO

Sure, Devin. Look, I think it's a little bit of everything. I think clearly there were companies that were challenged that in more normal markets would have needed to do substantive restructurings in 2021. But just given the extraordinary risk-on marketplace, mean stops, SPACs, and an abundance of capital, everyone chasing yield, a lot of those companies were able to sidestep having to restructure balance sheets. That risk-on environment and mentality and mindset is clearly no longer present certainly to the way or to the extent it was a year ago. So companies that were able to do amended extends and the like and kick the can down the road, or to raise fresh equity, that sort of path is increasingly being blocked. So you have that. Then on top of that, with companies that operate with relatively thin margins, it's the confluence of rising interest rates, inflationary pressures, commodity costs, labor costs, and supply chain disruptions. And if you're dealing with relatively thin margins to begin with, that puts pressure on companies. And at some point, we'll have to see, as the Fed tries to take all of this liquidity out of the marketplace and tries to tamp down inflation, the question is going to be, can they do that and get us to a safe landing? Or is there some potential that will hit a true contraction from a macroeconomic perspective? If we then do that and demand dries up for a lot of these companies, you'll see another wave. So if you just look at the way high-yield credit is trading, you're seeing a lot of pressure but not enough to move them from some pressured credits to really troubled credits. And I think the stress is still early and I wouldn't begin to suggest when we might see a step-function change. But what I am comfortable with is that we've sort of bottomed out in terms of restructuring activity. We as a firm have been quite successful in securing a significant number of mandates recently, and I just think that the tenor of our business is more constructive today than it was three months ago and certainly relative to the middle of last year.

Devin Ryan, Analyst

Great, okay. Good color. Thanks, Paul. I appreciate it.

Paul Taubman, Chairman and CEO

Thank you, Devin.

Operator, Operator

Your next question will come from the line of James Yaro with Goldman Sachs.

James Yaro, Analyst

Hi. Thanks a lot for taking my questions. So we obviously saw record moves in interest rates in the first quarter and rates have moved further in the second quarter. How, if at all, is this impacting your strategic advisory dialogue? And if not, at what level of rates would you sort of expect this to become more of a dampening effect on that side of the business?

Paul Taubman, Chairman and CEO

I believe that rates remain quite low compared to historical standards. The real challenge is whether companies can finance their transactions, and there's a significant amount of capital available in the market, although the cost of that capital has increased. At the same time, we're observing some pressure on equity values, indicating that the market isn't moving in a single direction. The larger issue at hand is uncertainty and volatility. In Europe, as we've discussed, upcoming elections in France are causing many companies to hold off on decision-making as they assess the broader political situation. There have been moments when it seemed the conflict in Ukraine would escalate and others when there were signs of progress. Until things stabilize globally, there may be some hesitancy, but I don't believe current rates or financing conditions are significantly hindering activity. It's more about raising expectations. Many companies still need to make strategic transactions, but they may find this environment less favorable than it was a year ago. Nonetheless, transactions are still occurring across various industries and regions. I can't predict with certainty when the market might slow down, but for now, we are not close to that point. We have, however, taken a pause from the intense pace of last year. It's essential to consider the volume of activity from last year and recognize that, despite the current volatility and changes in rates, global M&A market volumes are down about 15% year-to-date, which reflects a healthy system overall.

James Yaro, Analyst

That makes a lot of sense. If we were to enter a longer period of weaker economic growth, you clearly have significant resilience in your business, primarily due to restructuring. We observed this during 2020. Could you discuss whether such an extended economic downturn could present an opportunity for faster growth in hiring? Additionally, considering your relative strength compared to firms that are more focused on strategic advisory, would this make it more appealing for you to engage in more inorganic activities?

Paul Taubman, Chairman and CEO

Well, look, on the hiring side, we are a growth company, see enormous growth opportunities, we're going to continue to grow, but we're not going to chase growth. So we are a destination for talent, and all of the talent that fits our culture that can add to our capabilities, we're all in. And that's never been the issue, and we're going to continue to grow. As we've said consistently, when you're trying to recruit and everyone is locked down in a COVID environment and they're all from home, it's far more difficult than when you can get people in-person, face-to-face and let them walk the halls and really feel how special our firm is. And as the COVID lockdown and the work from home recedes and we get back closer to the old normal, that's going to benefit us from a recruiting perspective and we've already seen that. The other thing is when you're talking to best-in-class investment bankers and they're dealing with a tsunami of deals because 2021 is the height of activity, it's difficult for those individuals to really extricate themselves from all of their client entanglements. So what we've also said is that perversely, if the market slows down a little bit and bankers catch their breath, it's easier for us to have those substantive conversations and the switching costs go down. So the way we see it, all of those sight lines are positioning us to be able to pick up our recruiting momentum because of that confluence of events. And when we think about where we can add best-in-class talent, it's really across the firm. There's no doubt a disproportionate amount is going to be in strategic advisory. But in our Park Hill and restructuring businesses, there's always opportunities for us to add best-in-class individuals. And then as it relates to acquisitions, like I've been quite consistent, which is if you can find the right ones that are in line with the culture and bring the right incremental capabilities that are not duplicative, it's a wonderful thing. They're just very difficult to find. We have a high bar for those.

James Yaro, Analyst

Okay. Thank you.

Paul Taubman, Chairman and CEO

Thank you.

Operator, Operator

Your next question comes from the line of Steven Chubak with Wolfe Research.

Brendan O’Brien, Analyst

Good morning, Paul. This is Brendan O’Brien filling in for Steven. So on the sponsors, while your firm is viewed as being more reliant on large cash strategic M&A, recent trends suggest that you've had a lot of success winning deals among current sponsors. Can you speak to the strength of your sponsor franchise and whether the recent wins within the space are something we should anticipate more of going forward? And maybe provide a bit of color on your strategy for growth there?

Paul Taubman, Chairman and CEO

Sure. Well, first of all, I've always said that there are two types of firms. There are firms that do large deals and small deals and there are firms that just do small deals. And just because you do large deals does not mean you do not do smaller deals. There's always a reason why you want to be able to follow your clients. It may be to have insights into new technologies. If you're a FinTech banker by definition, you're looking at the next generation disruptors. If you're a med-tech banker, a life sciences banker by definition, you're looking for the next company that's going to be able to sort of change the lives of people from a drug discovery perspective. So you always need to be going up and down. But there are only certain firms that have the confidence of the largest, most sophisticated companies to do the largest and most complex transactions. And that's the space that we seek to occupy is to be called upon to do the largest, most complex, most sophisticated transactions, but also to be able to find opportunities and to follow our clients, regardless of transaction size. And as it relates to financial sponsors, what we've consistently said is we're on a journey, and every day that goes by we strengthen our firm by adding more capabilities. We have more domain expertise. We have more capabilities. We have more ways in which we can serve clients. And we have a lot of incumbent strains as it relates to financial sponsors. We have our Park Hill business which touches an enormous number of alternative GPs. We have a leading restructuring practice, which spends a lot of time dealing with highly leveraged situations and sponsors have a disproportionate number of portfolio companies with leveraged capitalizations. We have deep domain expertise in many industries, and as a result that creates a compelling reason for sponsors to want to talk to our bankers. We have a significant initiative in direct lending, which is another reason. And every day that goes by, we do more of that. I've always seen sponsors as being an ever-increasing part of our practice. And it's just part of the journey. So I wouldn't monitor it too much quarter-to-quarter. But I am quite confident that over time, our balance of business between corporates and sponsors will look a lot more like the way the overall market breakdown is between corporates and sponsors.

Brendan O’Brien, Analyst

That's great color. And then as a follow-up, as you noted, the conflict in Ukraine is having an impact on activity across all geographies. But it feels like Europe has been more severely impacted given its closer proximity and heavier reliance on Russian exports. I was hoping you can discuss what you're seeing in terms of activity within the region on both a standalone basis and relative to the U.S. across both strategic and sponsor M&A. And maybe a little bit of a compare and contrast on the construction side as well.

Paul Taubman, Chairman and CEO

I'd be glad to. The statistics are fairly consistent. If we look at global activity levels year-to-date, we're seeing a decline of about 15%. I've often questioned if certain transactions are truly M&A or just another form of IPO, but when viewed from that perspective, the market appears to be down around 15%. The U.S. has demonstrated the most resilience, while Europe hasn't been significantly weaker. The real challenges are in the rest of the world, particularly in Asia. However, there are notable areas of strength in Europe, with the UK presenting significant opportunities. Many investors are turning their attention to smaller and midsized companies in the UK due to attractive valuations, which differ considerably from those in the U.S. This discrepancy likely contributes to the strength we're observing. The recent election results in France may also stimulate some renewed strategic activity there. Ultimately, the future will heavily depend on how current sanctions unfold and whether we can reach a resolution to the ongoing conflict. While I'm hesitant to predict the outlook with certainty—as no one truly knows—it's clear that the further one is from Europe, the more insulated they tend to be. China has its own set of challenges, but Europe still has substantial activity in pockets. It's worth noting that our firm is relatively smaller and not heavily reliant on macroeconomic trends; we're focused on building our business one client at a time. Despite the broader economic climate, we're optimistic about our progress in Europe, which is what sets our firm apart.

Brendan O’Brien, Analyst

Great, that's great color. Thanks for taking my questions.

Paul Taubman, Chairman and CEO

Thank you.

Operator, Operator

And that was our final question. So I'd like to now turn it back over to Mr. Paul Taubman for his closing remarks.

Paul Taubman, Chairman and CEO

I gather there may have been a static on this call, which I really apologize. And again, I appreciate everyone's time and attention and interest in our company. And we will get back at it in three months. And I wish everyone a good day, and we'll be speaking soon. Thank you.

Operator, Operator

That does conclude today's conference. We thank everyone again for their participation.