Q1 2020 Earnings Call

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Good day and that come to the P.J.P. part that's Q1 Twentytwenty earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Sherman P.S. <unk> head of Investor Relations. Please go ahead.

Thanks, very much Sanjay <unk>. Good morning, welcome to the TJ cheap hot stuff or say Twentytwenty any conference call.

I'm, Sharon pass and head of Investor Relations at Peachy partners.

Joining me today, its toll Chapman, our chairman and Chief Executive Officer, and tell them make a chief financial officer.

Before I turn the call I touched Paul.

Wanted to point out the change of course is this conference call. We may make forward looking statements.

These forward looking statements is subject to various risks and uncertainties.

And that are important factors that could cause our actual outcome could differ materially from that indicates didn't these statements.

We believe these factors that could scratching their risk factor section.

Taken P.J.T. pop mid Twentys 19 form 10-K, which is available on our website at P.J.T. Potratz dotcom.

I want to remind you that the company assumes no duty to update any forward looking statement.

So the presentation, we make today contain non-GAAP financial measures, which we believe a meaningful in evaluating the company's performance.

The detailed disclosure on these non-GAAP metrics and they've got reconciliation 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 luggage pool.

Good good morning, Thank you all for joining us today.

We hope all of you were lifting it are doing.

Well under the circumstances.

Because you all can imagine we're conducting this call remotely Sharon held and I are all calling in from different locations.

So please forgive us an advantage if we experience any technical glitches.

It's nearly impossible to convey the extent to which the world has changed since her last earnings report in early February.

The enormity of this health crisis, and the severity of its economic impact continues to unfold in real time.

The loss of life and livelihood as hard as Adam.

And yet in this darkness, we have seen extraordinary heroism from health care professionals as well as untold number of central workers across industries.

On behalf of our entire from I would like to express our collective gratitude to all those who are serving on the front lines.

And in our own small way, we've tried to do our part.

At the outset, we identified those nonemployee support staff.

Who would be most economically impacted by the closing of our offices.

And work to make sure that they continue to receive paychex.

We donated all of the and 95 match, we had to local hospitals.

We had previously procured these mass as part of our business continuity planning.

We're donating more than $2 million from the firm and its partners to co. Good related causes with 1 million of that amount coming from the firm.

And consistent with our firm's civic focus we have restructured or summer internship programs to ensure that are in turns to vote meaningful time to community service.

Since this crisis began or from has remained fully operational and client centric with almost all of our employees working remotely.

Our firm's insights expertise and collaborative approach to problem solving.

I have never been more differentiated or more highly valued by clients as management's inboard seek advice on how to best prepare.

For an uncertain future.

From the outset, we had been focused on a variety of employee initiatives to support our colleagues health well being and safety.

We have stepped up and already high level of communication and engagement.

In order to maintain are differentiated culture.

Even in the absence of physical presence.

Our ongoing commitment to partnership and team work has been an essential element.

In enabling our firm to navigate these challenging times.

Turning to our financial results.

These first quarter results reflect our significant momentum heading into 2020.

Revenues grew 56%.

Adjusted pre tax income grew 160%.

And adjusted earnings per share grew 154% compared to a year ago.

Turning to each of our businesses in a bit more detail.

The restructuring.

Our restructuring revenues rose significantly in the first quarter versus a year ago and.

And more modestly on a sequential basis.

Since the onset of the economic shutdown, resulting from the pandemic.

We've experienced a dramatic increase in restructuring activity.

This significant uplift in activity has continued into the second quarter.

And while our first quarter restructuring results do not reflect this increased level of activity.

We do however, expect our financial results to reflect this elevated activity overtime.

In this volatile environment the level of cross divisional collaboration has never been greater.

Clients are turning to us for advice on a wide array of liability management liquidity issues.

Rising from the crisis.

Binding the expertise of our restructuring team with the capabilities of our capital markets advisors as well as the industry expertise and relationships of our advisory Bakers, There's a difference maker for clients.

I have often spoken about the benefits of having three highly synergistic and complementary businesses all working together to better serve clients.

Our leading restructuring practice has always been a critical differentiator for the firm.

Now more than ever before.

Turning to strategic advisory.

And strategic advisory revenues increased significantly in the quarter compared to the prior year.

Reflecting increasing returns on our consistent and deliberate investment in the business.

We enter 2020 with a strong backlog of announced but not yet closed transactions.

And we announced a number of significant transactions in the first quarter prior to the market dislocations.

Well there has been a dearth of announced transactions post coated our client dialogues have expanded in both depth and breadth and are increasingly focused on capital structure and liquidity opportunistic M&A.

Sponsor related activity shareholder engagement and shareholder activism.

As a result, there number of active client mandates has increased significantly.

We've always believed that in difficult times such as these.

The ability to deliver extraordinarily high quality advice from an integrated team of experienced bankers would increasingly serve as a point of differentiation for our firm.

In today's environment more and more clients are gravitating towards us.

And our traction with key decision makers around the globe has never been greater.

In the first quarter, we added three partners, bringing the total number of strategic advisory partners to 49.

And consistent with prior updates we continue to be in active discussions with a broad group of highly talented senior bankers to join our platform.

While our desire to expand our strategic advisory franchise with the highest quality individuals' remains on diminished.

It will be incrementally more challenging to successfully recruit and onboard individuals as long as we are in an entirely remote work environment.

We expect the pace of recruiting to slow, but not to stop until things return closer to normal.

Turning to P.J.T. Park Hill.

In P.J.T. part kill revenues increased modestly in the quarter versus year ago levels.

Looking forward, we expect many fundraisings to be delayed as a result of these market dislocations.

Until there is greater market stability, including increased clarity as to Recalibrated asset values, we do not expect the fund raising cycle to return to more normalized levels.

In light of the significant delays and completing many of these fundraisings, we expect P.J.T. part kills revenues to be down significantly in 2020.

Reviewing your capital priorities at our 2020 outlook.

Before I turn it over to Helen I wanted to review all of them.

We have the benefit of a balance group a very attractive leading businesses that are all highly cash generative. We have always been conservatively capitalized and we ended the period debt free and with our largest first quarter cash balance since inception.

We expect these cash balances to grow throughout the year.

We expect and 2020 in our strongest financial position ever.

In light of the uncertain economic backdrop, and a significant share repurchases. We effected in the first quarter, we are unlikely to be very active with our repurchase program for the balance of the year.

Turning to our 2020 outlook.

We have always said that we have built to grow in most any market environment.

For years four months into 2020, and we're not operating in most any environment.

Rather we are operating in unprecedented times.

Notwithstanding this extraordinary backdrop and the abrupt changes in market conditions since we last reported.

We continue to expect our revenues to increase in 2020.

However, any sense of specificity beyond that is no longer appropriate given the historic uncertainties, we're all facing.

And with that I will now turn it over the Helen to review our financial results.

Thank you Paul good morning.

Beginning with revenue.

Total revenues for the quotient, what 200 million up 56% here I think heal the breakdown of revenue.

Advisory revenues were 157 million up 50% year over year, let's significant increases in both strategic advisory and the fact from revenue.

Placement revenues, the 59 million up 67% year over year, reflecting strong corporate <unk> private placement activity and an increase.

Sometimes anything.

Turning to Fenton consistent with prior quarters, we presented the expenses the certain non-GAAP adjustment and these adjustments more fully described in our 8-K fits the Jeff the compensation expense.

We accrued adjusted compensation expenses 65 to think of revenues for the fifth quarter compared with 64% in the third quarter 2019.

Given the highly uncertain macro economic crop, we raised our accrual rate modestly and we will refresh this accrue at the end of the second course huh.

Turning to adjust that Noncompensation expenses.

That's an adjusted non compensation expense was 51 million in the fifth quarter Twentytwenty down slightly from the first quarter 2019, and down 7% from the fourth quarter 2019.

As a percentage of revenues on non compensation expense of 15.3% from the phase coursa down from 24.2% in the fiscal into 2019.

We experienced a lot supply and travel them related costs down 24% year over year as a direct impact of cobot 19.

Net reduction in travel in relation with highly concentrated in the last few weeks if the core so.

We also had lower professional fees and of course.

Offsetting these declines were higher occupancy costs.

Related to the additional space, we took on last year and lines of anyway, as well as high I spend and communications and my team.

In response to clip at 19, we made investments to enhance our remote computing infrastructure and we provided additional support to many of our employees to help them and their transition to working remotely.

Turning to adjusted pre tax income.

Reported adjusted pre tax income of 59 million for the fifth quarter up significantly compared with 15 million last year.

And our adjusted pre tax margin was 19.7% for the fifth quarter compared with 11.8 to saying the same period last year.

Provision for taxes.

As with prior quarters, we've presented our adult is that all partnership units had been converted to shift and that one of our income was pets at a corporate tax rate.

We've also annualized benefit relating to the delivery of fixed and she is during the first quarter.

Hi, resulting effective tax rate for the full year is expected to be 26%, which is the rates we applied in the fiscal <unk>.

Our adjusted if converted their names with 71 cents per share for the past quarter up significantly compared to 20, I think to here and the first quarter last year.

On the share count.

For the quarter at weighted average share count was 40.9 million here.

During the first quarter, we repurchased the equivalent of approximately 1 million share.

Through a combination of open market repurchases.

Changes and net settlement of employee tax application.

We repurchased approximately 540000 hasn't yet the market.

Which include a 325000 here from course yeah.

But currently M. A c's of exchange notices for approximately 177000 pounds shipped units.

As we have done on the path even exchange these units okay.

On the balance sheet, we ended the quarter with $113 million from cash cash equivalents and short term investments.

And 208 million in networking capital.

We have no debt outstanding and a full line of credit is available to us.

And as pull referenced earlier, we expect to end the year with our strongest cash position either.

Finally, the board as opposed to dividend <unk> five cents per share.

Dividends will be paid on June 17 to 2022 class a common shareholders of record as of June Kid.

And with that we will now take your question.

Thank you very much.

Well now take off last question from David Ryan JMP Securities. Please go ahead.

Great. Good morning, everyone said, Devin Ryan with JMP, how are you guys.

We're currently Kevin Thanks, Nice to hear your voice.

Yeah, you as well I guess first question on restructuring and and you know PGT clearly has a leading if not at the leading restructuring practice and so I think you know that business clearly will provide some ballast in this environment. So if you can call maybe try to give us some more contests.

Next on how the restructuring business performed.

In the prior cycle, a company wasn't public but any contacts in terms of how the business performed how it scale did it did a double or more and revenues or anything you can get perspective around that and then you know how we should be thinking about maybe the hand off here between restructuring and M&A advisory.

I appreciate M&A advisory is not going away, but to the extent, we see some decline in activity relative to what was expected, but restructuring is accelerating at how to think about the two dynamics there on revenues and that just the last piece of the question just around restructuring being kind of a longer tailed business toward.

Closing are you seeing any evidence that the cycle could be different than revenues could come in a more quickly. So just some context there would be helpful.

Okay, well, there's there's a lot in that question. So let me, let me try and there.

The answer it or to the best of my abilities and then please feel free to follow up. So we can we can make sure that where were getting at at all of your question. The reality is in the last economic downturn or there was a tremendous uptick in restructuring activity.

But I don't really pay much mine too what what the predecessor business looked like at that time because were entirely different from today. We have nearly 50 very senior strategic advisory partners, who are working hand in glove.

With our restructuring team and are really the arms and legs and the front end and the relationship managers providing.

Industry expertise and real capital markets input alongside their restructuring.

Rather in so I I think about it as we have you know 65, or so liability management and restructuring partners, who are engaging with clients, which is certainly not something that happened previously and clearly.

You know the entire world is open to us today in a way that it wasn't a decade or more ago. So what I'm seeing is a couple of things one.

Every client or from the largest are the most financially secure to smaller companies now needs to think about capital structure and liquidity. It's a core strategic imperative to make sure that you have the appropriate capitalization that you have adequate liquid.

Entity and since no one really knows what the shape of the curve is gonna be and how long until we start.

Crawling back to normal and what's going to be the pace of the recovery and the like it it causes a whole series of strategic conversations to occur that here Q4 did not occur and we are where I believe uniquely positioned to have that because weve built out not only a very robust strategic advisory.

Business, we've built out a very strong leading edge capital markets Advisory business and then we have a leading restructuring business. So I suspect that what you're going to see here.

Is yeah. This is the first wave and the first wave is all of the sudden with markets seizing up.

And with a many businesses effectively shut down liquidity or issues come to before and you're dealing with those companies you know first and foremost because they have an immediate need to to address these issues otherwise they literally will run out of cash.

Then you have other companies, who stand on higher ground, but are unsure as to high how high the water level is rising to and they're looking at their own capitalization and they're asking themselves whether they need to affect certain liability management actions to give them. So.

Sells more runway.

And then I think you're going to have a third wave where depending upon.

How quick the snap back is we may be in you know reduced economic environment with lower consumer spend lower business spend for an extended period of time and if that's the case.

You will see a certain companies who today are standing on very firm footing meeting to address these issues going forward. So a I think there's there's just a very long cycle of of activity here and.

And we're going to do everything we can to serve our clients and make sure that were able to.

To be a forward leaning in having having those conversations and being there to provide that advice to a two are quite that's.

Okay I appreciate that color and I'm also curious I mean these moments.

It is unfortunate they are in terms of just the backdrop. They do to your point, Paul maybe create situation, where I'm, having many capabilities around advice become more important and so I'm just curious in terms of that the conversations you're having today.

It sounds like you are still quite active I'm just in advising.

Clients or are you seeing more companies that you maybe haven't worked with before request.

So to speak or how are you.

You know interacting with maybe firms that you haven't interacted with before kind of since the pandemic sorted in or is there more interest for firms to talk you just given the holistic type of device that can provide.

Yeah, and again, there's a lot and in that question too I think.

You know this has been a shock to the system to to virtually every company and the fact that yeah. We are you know singularly focused on giving advice that we've been operational the entire time that were not.

We're not distracted by our own issues about capital allocation balance sheet lending.

Or or other businesses has enabled us to be laser focused on clients and in a world where we're operating you know 100% outward facing.

Clients are trying to make sense of the world not surprisingly, we're getting more traction with more clients and then there are more clients, who now recognize that they've got issues to deal with that here to four they've not had to confront and all of sudden.

Hi, thank advice to see less as a commodity and more as a as they differentiating factors. So you know our in a number of mandates and our number of dialogues are up considerably.

The reality is there may not be you know much too to do under way of actual transactions or to monetize that but we're fine with that because.

We've always thought about building our business for the long term and the more clients that we can engage with.

And the more dialogues that we can have we are confident that we're going to show very well. So we view that as a good thing and inevitably that will lead to good things and then I think the last point I'd make is as we're all trying to adjust to a world in which we're working its way.

Lucidly remotely.

I will say that I think all of us fine that were probably working harder.

And spending more time engaging with clients because we don't have all of these other distractions were not traveling.

We're not spending all this time coordinating meetings were just getting on phone calls videoconferences.

Exchanging messages with clients and I think where we're able to spend a lot more time.

For every every minute of every hour and every hour of every day.

Gauging with clients without any any wasted time. So I think it's also enabled us to be far more intense and far more efficient.

Okay, Great and then just last one for me appreciate the out the outlook commentary and just any update there and I appreciate that.

It's difficult to be overly specific, especially just given the uncertainty in the environment I'm. So I guess you know just trying to get that you still expect revenues to be up year over year, and so I guess what level of or maybe said another way what could change.

That you know here, we're evolving pretty quickly in the backdrop and so what what would it take the kind of change that view that revenues.

I'm actually grow year over year.

I I think I'd start by saying, we see the environment as it is today. So this is.

Where we sit with four months of the year done in dusted eight months could go a we obviously have a lot of our business or in Tampa review and then restructuring has a heavy retainer a bad to it. So we have a lot of visibility we have a strong backlog of.

Now is to not yet closed transactions, where well nothing is guaranteed and this worldly we certainly have you though.

Heightened visibility on that and we've experienced a what has been incredibly difficult six weeks. So I don't make that that comment lightly.

But at the end of the day, we're dealing with such on certain times, when I step way back.

I feel that our restructuring business. This year you know.

It is moving upward until the right our strategic advisory business and 20 Twond. He is moving upward enter the right.

By way of a strong camber view business.

And the Park Hill business, However will will be directly impacted this year as transactions get pushed out when I looked at the totality of that.

That is or what we what we expect is for you know consolidated revenues to grow.

For the year and I, just don't want to try and put too fine a point on it in a world where.

We gave more more specific guidance at the beginning of the year, but that was a more normal times I think.

Truck.

I'd to underpin it and let's see here your develops.

Yep.

Appreciate it very much a policy and thanks for taking the questions I'll get back into queue.

Thank you Debbie.

Thank you very much fever, no take a one last question from some meat Moody from high Paulson, plus Sofia, Chris that research.

All right great. Thank you very much.

Can you talk a little bit more about the appetite levels between a strategic and sponsor M&A activity on either the target or acquire sides of conversations you're having said that.

On the Oh, I'm, sorry on the other strategic advisory side, what sort of yes strategic conversations are being head.

Yeah, and then why do you think it isn't it.

Sorry go ahead.

On a no I'll just say I just both on the strategic and the sponsor side and if there's any differences kinda today in this environment. That's maybe January February is kind of contrast thing.

Yeah, I think with respect to sponsors we've always had a different view of the world than maybe others, which is there's been oldest talked about dry powder being an accelerant to.

M&A activity and I think you've heard us consistently be somewhat dismissive of that.

That view that that is often espoused.

And the reason for that is if you look back empiric wage sponsors tend to be very.

Very much attuned to valuations.

And therefore, we didn't see that in a bull market with high valuations sponsors were going to take activity levels to even higher levels.

What we have always believed than I think it's starting to prove out is that all of that dry powder is a very helpful and healthy shock absorber in the system, which is as valuations are pressured.

That all of sudden sponsors will start to step into some of that void and deploy capital and we're starting to see some of that.

But in the very near term in order to have sponsor activity you need a few things you need motivated sellers.

Do you need attractive valuations for buyers.

And very importantly unique confidence that if you're making an investment.

That with that money the company's capital structure will be sufficiently righted that it won't need to go back to the well.

When you try and triangulate all of those things.

That universe is not that large today, because there's so much uncertainty in the world.

I suspect that as you know the full extent of the economic downturn damage to some of these companies is better no and.

And there is you know a more sober assessment of what these companies need to either survive, we'll get to the next level.

There's a new evaluation or paradigm, a new equilibrium.

You will see you know increasing levels of sponsor activity. So we're having many of those conversations.

Unclear, how many of them get affected in the very near term.

But I suspect that over time, you'll see increasing.

Momentum in that regard.

And with respect to.

The M&A I'll give you a just a couple of thoughts of this.

This global health crisis.

This economic shut down these are gonna have.

Very far reaching long lasting effects and they're going to be lots of scars and they're gonna be certain industries that are going to come out of this severely compromised they're gonna be.

Other industries that are going to come out of this straight the then they're going to be others, who.

I will just be a lot of.

Have a enough of a buffer or a cushion and I suspect that the conclusion on average will be that most companies will try and take some leverage out of the system and the way you do that is you.

Hi, there you know raise equity.

Or you de lever by you know selling assets and I suspect, you'll see both and I take a that latter point will be a meaningful catalyst to M&A activity and then I suspect that they'll be a lot of companies who recognize that the world is consolidating.

For a variety of reasons that we've talked about consistently and they will conclude that having been set back. These number of years, it's no longer realistic for them to spend the money and the dollars to create the necessary scale and they will probably be more willing to.

It'll be consolidated by others, and I think that will probably increase the level of M&A activity overtime.

I think.

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You know that the other dimension here as the geopolitical dimension and I suspect that increasingly you know U.S. companies are going to want to rethink their supply chain and where their suppliers domiciled and I suspect that countries around the globe are going to be though take a more expansive view of.

You know what industries or what companies you know are important from a national security perspective that that may.

Reduce some cross border activity. So I think there's going to be a changing nature in face of.

Of activity. Some of these conversations are starting to occur, but I think the reality is that for most companies. There just trying to understand what is the new paradigm looked like what does it mean for their company is their capital structure the appropriate capital structure, what do they need to do operationally how did.

They embrace their employees how did they start to think about or the inevitable reopening of the economy.

And over time more of the conversations that I've just talked about will probably move to before I think there more in the background today, but they will overtime.

As the ground ceases to shift as dramatically as it has been starts to stabilize.

I suspect you'll see a more of those dialogues that move.

To the to the front of the line.

I hope that's helpful.

Yes, that's really helpful. Thanks for all that callable and I just wanted to pivot over to restructuring for a moment. If I could you know noticed the partner count hasn't changed much has 2016 you know it's kinda last time, we saw a spike in the energy sector. I. Just wanted to you know ask you know with the scope of today's dislocation as being a little bit.

Wider it have you had any issues keeping up with the demand in this environment, whereas a team kinda able to kinda cater to all the client <unk>, how should we think about capacity there and how you deal with that.

Well I as I said before and I do me this man I I'd view us as having 65 restructuring partners because at the end of the day capital structure liquidity balance sheet. Those are strategic issues and those dialogues are happening you know from the from the.

The biggest companies down to the to the smallest so we've increased our you know number of a of partners in restructuring we've increased headcount in restructuring, but most of the increase has come about as we created this capital markets advisory.

Capability that really sits between strategic advisory and restructuring and you know many and now most is ultimately a whole of our strategic advisory partners are quite experience as it relates to.

Liability management issues capital structure issues.

Capital raising and are intimately involved in these transactions so, whereas we might have had nearly half of our restructuring assignments that were crossed staff, though I don't have the exact numbers, but I.

I'm quite confident that today, it's far more than half trend, it's it's heading towards a.

Towards nearly 100% and the issue the issue with capacity is just making sure that you're focused on the right companies with the right you know a relationship and and the right economics because clearly.

You can you can find yourself spending a lot of time.

Ah on situations that are that don't amount tomorrow. So it's really no different than any other business you always have to be very disciplined very focused and making sure that you're spending your time wisely, but we're quite confident that we have the capabilities and the resources to ER to deal with a restructure.

During environment that turns out to be much larger and that persist for a much longer period of time.

Right. Thanks, and then just one last one from me.

Thanks for the color on the hiring expectations and then for that pace to maybe slow a little bit through this quarantine, but I just wanted to follow up and I know, it's still early days, but the last crisis. We had we had kind of a unique opportunity for some of that high performing talent at the bulge bracket it entity competitors.

Kind of shift moving around just wondering if you guys expect to see those same opportunities. This cycle, maybe after the 14th start to get listed and that's when we'll be looking elsewhere.

I look we we have maintained for a long time that the caliber of individual who is prepare to leave their bulge bracket firms to come to affirm like ours has grown over time.

And the reason for that is this business model is far.

More excepted.

And embedded in the thinking of corporations around the globe today than it was five or 10 years ago. So the proof of concept exists in a way today that it did not 10 years ago.

And I've always maintained that the caliber of individual that is prepared to come to a for like ours is dramatically greater today than the talent on average that was available.

Leaving big firms 10 years ago.

And therefore, a this this crisis doesn't change that.

And I suspect that overtime, there will be a continuing you know steady flow of talent that that moves because increasingly that's where clients want or their talented bankers to reside and smaller advisory focus firms where advice is the main event.

And we intend to you know continued to grow in that regard I was making the point, which is in a world that is entirely remote.

It is more difficult.

To have individuals' really get a field for our firm when it's all zoom calls and the like than it is.

You know spending a few hours together in a social environment and meeting far more people rather than doing it remotely and the ability of Onboarding individuals is greater and we're still going to higher because there are individuals who are known to us and we know quite well and have expressed a strong interest in.

Joining so we're going to continue to add individuals, but I need to be realistic and and and.

And let everyone know that all else equal the degree of difficulty in getting individuals.

Fully vetted by the partners and having those individuals completely confident that they understand what it's like to work at our firm has to be more more difficult in a completely remote environment. So in the near term I suspect it slows, but that didn't know way should be viewed as an indicator about what.

Our longer term objectives are aspirations are.

Got it great. Thanks for taking my question.

Great. Thank you all for for listening in today and.

We wish that all of you stay safe and that the next time, we get together we are.

Experiencing the healing process, a in our country and in the World and we we thank you for your time and support and look forward to speaking to you at our next earnings report. Thank you.

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

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