Q2 2020 PJT Partners Inc Earnings Call
Ladies and gentlemen.
Hi.
Welcome to the P.J.T. partners second quarter 2020 earnings call.
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Good morning, and thank you very much Gerry and welcome to the P.J.T. partners second quarter Twentytwenty earnings Conference call.
I'm sure NTS and head of Investor Relations Upstate T. partners.
Joining me today, it's cold Hoffman, our chairman and Chief Executive Officer.
When they actually spend actually [laughter] before I turn the call their digital I want to point out that during the course of this conference call. We may make forward looking statements.
These forward looking statements are subject to various risks and uncertainties and they're important factors that could cause actual outcomes to differ Jeremy.
As indicated in statement.
We believe these factors are described in the risk factor section contained in P.J.P. partners went to 19 form 10-K, which is available on our website at P.J.T. partner Dot com.
I want to remind you that the company of students nurture T to update forward looking statements.
The presentation rebate today contain non-GAAP financial measures, which we believe a meaningful and evaluating the company's performance.
For a detailed disclosures on these non-GAAP metrics.
GAAP reconciliation you should refer to the financial data contained within the press release issued this morning also available on our website.
That's all tend to call that gets pool.
Thank you shared.
Good morning, Thank you all for joining us today.
Since the start of reform, we have consistently spoken about an unwavering commitment.
Sure building or business through sustained.
Her chick.
Value added.
This quarter's called financial performance resulted in part.
From this continuous investment.
In the second quarter for wide revenues grew 40%.
The 233 million.
Well adjusted pre tax income grew 97%.
Adjusted earnings per share grew 96%.
Payer to a year ago.
Our strong results what propelled by standout performance in our strategic advisory business.
Coupled with continued strong performance in restructuring.
Year to date firm wide revenues grew 47%.
To 433 million.
Adjusted pre tax income grew 119%.
Adjusted earnings per share grew 118% from a year ago.
We have responded to these extraordinary times by seamlessly reorienting the way we conduct their business.
The transition to a remote work environment has been greatly facilitated by our culture. She wants.
Collaboration.
It shouldn't be.
What was a shared sense of purpose.
And we had worked diligently to enhance this environment through extensive employee engagement.
Ongoing training.
Wellness initiatives.
During this remote period, we have also continued to recruit and onboard.
Talented individuals at all levels.
Including a new full time clash of analysts and associates.
I'd have welcome summer interns from undergraduate and graduate programs around the world.
On the business flock, well M&A activity has slowed considerably.
We have used this time to broaden and deepen our relationships with both existing and new clients.
Ensuring they continue to received the highest quality advice and in charge.
Well, nonetheless could predict the depth breadth duration of this crisis.
We are confident that when this pureed patches.
Will emerge a stronger for.
Now turning to each of our businesses in a bit more detailed.
Turning to restructuring.
A world class restructuring franchise maintained its leadership position in the first six months or 2020.
Ranking number one globally and completed restructuring volumes.
Number two where they announced restructuring volumes.
The pandemic and the corresponding economic shutdown have caused a dramatic spiking global restructuring activity.
As a result.
Market, leading restructuring team has seen a significant increase.
In the level, it's restructuring activity.
While our restructuring results reflects substantial uplift from these higher levels of distress across industries.
The second quarter financial performance, principally reflects the momentum in our restructuring business heading into the year.
We expect elevated restructuring activity to persist for a considerable period of time.
The economic dislocations caused by this global health crisis.
Impact an increasing number of companies.
Turning to Peachy Park Hill.
Well the macroeconomic backdrop has benefited our restructuring business. It has also caused a significant slow down in P.J.T. Park kills fundraising activity.
In P.J.T. Park Hill revenues declined meaningfully in the quarter versus year ago levels.
Notwithstanding the dislocated fundraising environment.
80 Park Hill was able to successfully close a number of fund raises in the quarter.
Similar to our April comments, we continue to expect P.J.T. Park kills revenues to be down significantly in 2020.
However, we expect the business to return to its pretty cold that growth trajectory.
I wouldn't market valuation stabilize.
An onsite due diligence between managers and investors is able to reserve.
Turning to strategic advisory.
It's strategic advisory we enjoyed record results for the quarter and the six month period.
Our financial results increasingly reflect the investments we haven't made to increase our footprint.
Capabilities.
The straight to their business this quarter was broad based across M&A.
Capital markets liability management shareholder engagement and strategic IR.
Our number of active mandates continues to grow substantially.
However.
When we are operating in a challenging environment for transaction activity.
It is uncertain how many of these mandates will lead to announced transactions and if and when these transactions will be completed and reflected in our financial results.
Before I turn the call over to sell it to review our results.
Please allow me to welcome our newest board member Grace Rex didn't Skaugen.
Great that's been a leader in the international business community for many years.
That has served on the board's if some of the largest and most consequential European companies.
She has extensive public company experience.
Corporate governance expertise.
And we are honored to have heard join our board.
Helen.
Thank you Paul good morning.
Beginning with revenues total revenues for the quarter were 253 million up 40% year over year the breakdown of rhythm means.
Library revenues were 193 million up 45% year over year, driven by a significant increase in strategic advisory revenues.
Hi, something even use was 55 million up 23% year over year, driven by an increase in corporate private placement activity.
But the six months ended June 30, total revenues of 453 million up 47% year over year, the breakdown of six month revenues.
Hi, three revenues of 349 million up 47% year over year, driven by growth in both strategic advisory and restructuring and placement revenues of 74 million up 43% year over year, driven by an increase in corporate credit price mix.
Turning to expenses consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments. These adjustments on multiple you described in our case.
First adjusted compensation expense.
Just a compensation expense continues to be accrued at 65%.
This ratio represents a <unk> based instruments for the compensation ratios for the full year.
Turning to adjusted compensation schemes.
Total adjusted non compensation expense decreased 18% to 26 billion for the second quarter compared to 52 million for the time yeah.
The decrease in costs once you to significantly reduce travel and entertainment experience in the quarter as a consequence of the global pandemic.
As a percentage of revenue.
And non compensation expense was 11.3 distinct for the quarter.
Compared with 19.2% in the same period last year.
But the six month.
Total adjusted non compensation expense decreased 10% to 57 million compared with 63 million for the prior year.
That's what the second quarter year over year to increase was driven by significant reduction in travel them into time with activity due to the global can be Mike.
This decline was partially offset by an increase in occupancy costs, where they seem to be additional space. We took in London last year as well as some rent overlap in the first half isn't that offices in San Francisco.
As a percentage of revenues are non compensation expense was 15.1% for the six months compared with 21.3% in the same period last year.
Turning to adjusted pre tax income we reported adjusted pre tax income of 55 million for the seeking coursa.
Up significantly compared with 28 million for the same period last year and for the first six months, we reported adjusted pre tax income up 95 million compared with 43 million last year.
Our adjusted pre tax margin was 23.7% for the second quarter.
From 16.9% for the same period last year.
And 21 quick magazine for the six months up from 14.7% for the same period last year.
The provision for taxes.
As with prior courses were presented our results. There's a couple times shipping units have been converted to she is and that all other income was taxed at a corporate tax rate.
The book to annualize the benefit related to the delivery of his pitches during the first quarter.
That resulted an effective tax rate for the full year is expected to be 25.8 pissing.
We had applied a slightly higher if it could take sort of 26% in this this quarter. So we have adjusted to stick and could techs right to reflect the refreshes views of a 25.8% right for the year.
Earnings per share our Justin it's considered it ends where a dollar per share for the second quarter up significantly compared with 51 cents in the second quarter last year and for the first six months adults 72 per share of significant making people of 79 teams and the same period last year.
For the quarter, a weighted average share count was 41 million shares during the second quarter. We were pictures of the equivalent of approximately 177000. She is primarily through the exchange a partnership units the cash.
That total repurchases in the first six months totaled approximately 1.2 million.
Moving the exchange of approximately 404000 partnership units for cash.
The currently in the seat of exchange notices for approximately 202000 partnership units and as we've done in the past even exchanges units the cash.
On the balance sheet, we ended the quarter with a highest cash balance fever, or 247 million in cash cash equivalents and shorten basements and 279 million in networking capital.
We have no Sunda did outstanding and a full line of credit remains available to us.
Finally, the board as opposed to dividend of five cents per share the dividend will be paid on September 16th Twentytwenty to class a common shareholders of record as of September sick and.
I'm not trying to back to pool.
Thank you Hello.
Please allow me now to look ahead.
This unprecedented period has provided new opportunities to leverage the experience and expertise of our team.
Now more than ever.
Clients are seeking and relying on she's going to advice to navigate financial markets.
Execute strategies and better understand their old particular industry dynamics.
These imperatives play to our strange as a firm.
We have always been unwavering commitment to invest in our businesses.
And this uncertain environment, notwithstanding we will continue to stay the course.
We view this as a unique telling to adesto clients.
Our people, our partnerships or capabilities our infrastructure in their communities.
We continue to connect with new clients Bill trusted advisor relationships and secure new mandates.
We continue to expand the global reach of our franchise with a recent announcement.
Strategic alliance in the Middle East.
We continue to recruit senior partners to our strategic advisory platform.
With four partner hires year to date.
Bringing our strategic advisory partner count to 50.
We continue to expand their capabilities in established competencies or the firm like shareholder activism and further develop new capabilities in areas such as U.S.G.
We continue to invest in our infrastructure through the support of important I cheat and data analytics initiatives and we're also investing at our local communities.
Oh from has donated $1 billion to cope with the related relief and social Justice colleges.
And our partners and employees have committed to more than match that amount.
We continue to make all of these important investments while accumulating record cash balances.
Turing no debt.
And maintaining a consistent level of share repurchase activity.
We have a unique combination of highly synergistic and couple of victory businesses.
Each with its own particular growth drivers and correlations to the macro environment.
We remain in the early stages of our company's evolution.
And we're more optimistic about a long term prospects than ever before.
And with that Hello did I will be pleased to take your questions.
Ladies and gentlemen, if you like to ask a question you can see the by pressing star one on your telephone keypad keep in mind, if youre using your speakerphone. Please pick up the handset to allow that single treatment equipment.
Once again start one for questions.
Your first hand, Devin Ryan with JMP Securities.
Great Good morning, everyone.
Good morning Devin.
Good morning.
So I just want to start with.
The outlook and maybe I didn't catch this but I didn't hear any update around could expectations for revenue growth on the year I apologize if I Miss that but wanted to just make sure that still the expectation here.
I guess first off and then just more broadly on the M&A landscape. We've heard from several of the early earnings calls about some green shoots in activity just sort of the market watermarks have recovered in new financings starting to stabilize a bit here, but still lot of uncertainty. So I'm curious kind of what you guys are.
Specifically I'm seeing him in the backdrop today and yeah with the election coming and still some uncertainty whether you think that could change.
Okay, well first of all we do continue to expect to grow our revenues. This year I think these results just get a bear out every time that we have set about you know our prospects that are.
Optimism. So thank you for giving us that opportunity to clarify that point Devon.
Second with respect to the macro backdrop I mean clearly.
We're in the early stages of fighting this global health crisis and.
Katy you know initial hopes for just a very quick spring back to life as we knew it previously you know increasingly looks more remote and more distant and that really is consistent with what our view has been from day, one which is that this is unfortunately and long term swag.
And that there will be steps forward in steps back and they will be all sorts of shifts and move that's where there will be companies, who will benefit from the change and consumer and business behaviors and others, who will clearly be challenged for the long term and that has.
I think implications for restructuring activity, we expect restructuring activity.
To persist at elevated levels for a considerable period of time.
And I think at the same time, it will cause more and more companies.
To ask themselves, whether or not they can continue to operate as independent staff oil companies those who've been weekend.
Those who have emerged stronger or with holes in their strategic core competencies will last themselves, whether or not there will be opportunities to strengthen their business through acquiring capabilities or.
Creating efficiencies or comedies of scale or scope and then I'd say, most importantly, and to some extent that's what we're seeing right. Now is the next wave is companies are asking themselves whether or not there appropriately capitalized for this new world order and as a result, we continue to believe that.
That's companies embark upon a de leveraging process.
Well certainly avail themselves of good public capital markets.
We also believe that for many companies. They will continue to shed non core assets attempt to repair and restore their balance sheets and we believe that that will be you know over the next wave of M&A activity and we do believe that financial sponsors are well positioned to step into that.
That void and to provide us some of that or appetite for for some of these businesses, which will inevitably be a brought to market.
Okay, great. Thanks for that color and then just a follow up on the Park Hill business. So you to revenue this quarter beat our model reasonably and and we talked to comment obviously last quarter with the expectations for overall parks only be down substantially and still her about again this quarter.
Sure I'm. So it sounds like you know what placement revenues quite strong or I guess relative the piece that flows through advisory was softer. So I don't know if it's possible without parse through.
Some of the Advisory committee horses placement and whether placement I'm.
On raising has been better than expected. It just ended up obviously better than we'd expected. So.
I'm, just curious kind of how you're seeing kind of the parts of park will play out and water.
My patients I'm, mark or changing at all just with the backdrop, maybe a bit better today than it was three months ago capital raising.
I think we stand by what we said before about the challenge the environment to do fund raises in the Park Hill business in the near term, but perhaps Helen you can.
Take care, everyone through exactly how we report and what are what elements or in both our placement and advisory components.
Yes, sure said, given just to remind of it in a in the Park Hill business.
The fund placement does not switches in the real estate private equity in hedge fund at areas that is placement so that it's a placement fee and the secondary advisory piece of that business is typically book and advisory.
The one piece that of the more advisory business that flows through placement is a corporate private placements and that's the area that increased year over year and that was being significant contributor to the placement sequence.
Okay terrific and then just in terms of.
The overall outlook then what I guess suggests that the back half would be on the placement side quite a bit softer right I apologize I'm, just trying to kind of put it all together I understand that the moving parts of the model, but just want to make sure that I fully understand given the outlook within the various parts of popular.
I think the placement activity that is derived from the park Hill business, we expect to continue to be solved.
Clearly our strategic advisory business, you know is constantly having conversations and trying to.
Provide capital through private placements for corporate clients and that business at least you know your today it has proven to be robust.
And resilient and how that all flows through the placement line.
I'm not 100% certain I don't have a crystal ball, but what I think about the various business units.
Spec, though the park Hill.
Fund raising cost of seems to be challenged through the remainder of the year.
Okay terrific I'll leave it there and thanks for taking my questions.
Thank you Devon.
We will now move toward next question will come from Richard Frampton with Goldman Sachs.
Hey, guys. So I had a couple of questions maybe I could just follow up on on the revenue expectation. So.
You're talking about revenue growth for the full yeah, I think if I'm right in my calculations to get to flat revenue you'd see you'd need to see a 33% decline in revenues in the second half of it yeah.
I appreciate look there's a lot of uncertainty there's lot of moving pieces, but pull at this stage would you'd be willing to commit to a revenue growth band.
For 2020 or do you just feel the there's just too much from seven to this point.
You know, it's it's funny Richard I I deliberately left off their remarks that we continue to expect our revenues to be up for the year, because I thought that was standing with faint praise. So I I left that out yet I can also understand that by leaving it out it creates some uncertainties I do not want to continue to.
Provide financial guidance for.
For the rest of the year, and certainly do about a quarter by quarter basis.
But I tried in every way possible to express.
My confidence our optimism about our business and how were positioned gun and my hope is that as we've gone through the business commentaries.
That does.
But that has run true.
Okay, that's fine.
A couple of questions on the business. So can you talk a little bit more about the restructuring business. There's obviously, there's a lot of discussion earlier on in the quota about the fact, the financial markets reopened a liquidity became broadly available too you know corporates, including ones are the word distressed you know how did that end up playing out in.
Sums of the cadence of new mandates in the restructuring business over the course of the quota and relative to where we want it say in April may has your view in terms of revenue generation in that business changed either for this year or for 2021 as a result to them.
It it had our our perspectives haven't changed I think that maybe the outside consensus has changed we always thought that there would be a very quick you know a focus on companies that were extraordinarily challenged as a result, though the shutdown caused by this school.
Okay and data and that they were businesses, who came into this crisis with balance sheets and business models that simply could not withstand yeah. This is station of all revenue and all business activities for Eddie extended period of time and that was where the early mandates came from.
Now we have seen the capital markets open up who we have seen a lot of fiscal and monetary stimulus.
But quote Joe Louis ER.
Those of you don't know Joe Lewis the boxer from the 19 thirties, but the heavyweight champion you know its famous quote was you can run but you can't hide the reality is that for some of these businesses. They are so severely challenged for the long term.
That yes, there may be ways to create more runway.
And to kick the can down the road, but inevitably there will be more dislocation and more distressed because the <unk>.
The economic ripples here are going to continue for an extended period of time, and I think as more and more.
Folks understand that there's not just a very quick dramatic snapped back and that some of these businesses have been fundamentally altered.
That that that will create restructuring opportunities said that I think you'll also find that some companies were able to go the capital markets just to extend their runway but is.
This environment persists, you'll see more activity, that's always been our view.
And I don't think you can assume that the restructuring mandates just like a metrodome keep you know accumulating a week by week month by month that everything is up into the right it tends to be in clubs.
And we certainly hit the first wave.
We've seen some slowdown in that first wave, but we see all of the.
The foundation for Unfortunately, a second a second wave of of companies, who will will find that their prospects are quite challenged.
Okay last question I just wanted to ask was just on the margin mobility I mean, it was great to see improvement in the margin obviously, a lot of it's coming from the non comp side.
So should we think about that improvement you know as things start to normalize should we assume that that's been a bounce back to what it was in terms of expenses. What do you think this permanent changes as a result of working from home that you think will be adopted even as you know the pandemic subsides that should result in a higher operating margin going for.
Good.
Hi, it's a great question and I'll, let pellet add to it I think the reality is we don't know enough to know.
Exactly what the new normal is I have to believe that a world where there's virtually no travel is not the sustainable it'll base case long term I do think that our firm is particularly well positioned to work were mostly for an extended period of time, because it really does relate to the culture.
Sure.
And and the way in which people you know have grown up working with one another I do think that there or number of one off expenses that we've incurred as a result of this to retrofit our offices to make them safer.
And.
To deal with the new normal and I suspect that what do we get back to you know a world that hopefully we can describe as more normal.
That will have the benefit of a lot of experience and we'll find ways to streamline our operating model, but I just think it's too early to tell Richard or how all of that crops.
One way or the other and I I try not to focus too much.
On March and certainly in any quarter already two quarters because at the end of the day, we've always said that margin as output not an input and if our revenues grow but you'll certainly see margin improvement.
And I think Helen and team have done a terrific job is making sure that were always very diligent focus.
On costs that were spending Murray, where we need to spend and invest but that there's no wasteful spending and and then I think over the longer term you should see and you're beginning to see you know the benefits of operating leverage as the investments that were they translate into into higher revenues, but.
On the that'll lead it's driven by higher revenues.
Okay. Thank you very I would just said I would just said Richard but if you look it at a second quarter non comp expense. It really reflects the culture was mentioning no travel and entertainment and debt expense head start kids ran at about a $2 million a month. So it's it's not.
And with it it will get back to that level, but we certainly doesn't seem that it will stay as low as it did in Q2 for an extended period and that we have also maintained its pools that we expect that revenues to grow faster than on comp expense and so that's the way we would add into that.
Right.
Okay. Thank you very much.
Thank you Richard.
And we have.
Well take our final question from Steven Chubak with Wolfe Research.
Hi, good morning.
Good morning Hall is concerned I was pretty soon you're going to actually quoted a everyone has a plan until they didn't hit a.
So appreciate it each of those happen on the last.
One of the start off with just a question.
Financial sponsor activity remarks regarding potential pick up.
Relatively constructive I think back the last quarter Paul.
The your expectation for the pace of sponsored appointment of dry powder was maybe a bit less sanguine than others.
Could disappoint simply given relatively thought evaluations in a lot. There just wondering how you're thinking has evolved regarding the space without the business lunch I couldnt be whether there's been any material change.
I think what I think we've been pretty consistent or pre pandemic. We always said that we were not.
Falling in love with the concept of all of this financial sponsor dry powder because sponsors.
Though like.
Like everyone in.
The investing world needs to earn a return on their investment and that they were highly sensitive to valuations for that we saw financial sponsors as much more of a shock absorber to the extent they were dislocation.
Yeah, I think what you're seeing is they are you know, becoming the shock absorber and there have been dislocation. So we would have always expected financial sponsor activity to increase.
And your difficult periods as opposed to just you know, adding more fuel to the fire one what M&A activity was going through the roof.
He also said that you know in the early days.
Of the crisis financial sponsors first and foremost had to figure out their old portfolio companies, and which ones are worried unparalleled, which was needed tending to and care and then we said that they were focused on opportunities, which would be actionable, which would then require.
Companies that they were dealing with to have a more sober view of the new valuation paradigm.
And that that would take time.
And I think now as were getting you know into unfortunately, you know the fifth month.
Have a this experience I think there or you know probably more companies, but that now have been able to.
Survey the applications to their businesses and now or not and.
You know extremities mode, where they were just trying to keep the business afloat, there, they're now being more they have more time of their thinking about what the longer term you know future for their business is already which business units should be kept and how to get to target leverage levels et cetera, and that's why we we've started to see and we expect this.
Yeah.
War financial sponsor activity also believe Saturday.
In a world where everyone is trying to conserve capital it'd be prudent what their balance sheets.
It seems to us, but the first talking of liquidity should come from dedicated and investment pools, rather than strategics using their own balance sheet. So while there will be strategic activity.
Our expectation is but the next wave of balance sheet repair will be led more by financial sponsors than any other asset class.
Oh I guess one question for me on the recruitment backed up most of you get speeds to automate the outlook for crude Matt Holliday discussions are evolving post holiday and seeing any of the bold brackets get a little bit more aggressive just to ensure that day. It became their talent given some of the strike that they're sitting on the trading.
Hi, my better positioned than to a limit senior banker attrition in this type of environment.
I I can't really speak to you know what what individual financial institutions are or not doing but I do believe that our recruitment philosophy has been has been based on two things number one that we can provide an experience that it off.
Security to be a difference maker.
More entrepreneurial fast growing thriving business than they can.
Elsewhere, and I don't think about anything related to this pandemic has changed that relative comparison and the second is we've always said that senior bankers would want to come through a platform where they could better serve their clients there and I say call evidence continues to suggest that joining airplane.
Form as a way to better serve their clients. So what we think about what are the principal recruiting drivers.
We view them as as much and evidence today, if not more so than than previously.
It's Paul I'm, just one more for me on the upcoming election, I was hoping you could speak to it.
How election with Nike impacting deal activity, just given the uncertainty around potential change in ministration. They just uncertainty regarding the UK tax policy as well.
Hi.
I take the elections.
Clearly have a freezing effect on transactions, but only a subset of transactions and.
Starting with whether or not there and politically sensitive industries.
Ah whether they involve you know really pushing you know the existing anti trust you know Doc trend you know to the edge, where it's unclear.
And that if it will be you know, which which D.O.J.K. you because they said offers to review whether it involves you know signets, a significant consolidation benefits and job cuts, which run the risk of.
Being a campaign issue. So I think the reality is you do see.
Large you know somewhat controversial transactions all else equal being put on hold because no. One wants to make their you know deal, making a campaign issue. That's a that's a small subset, but they tend to be the largest deals which was one of the reasons why the size of deal tends to fall appreciably.
In an election year now size or deal has fallen this year, but we're also and.
Global economic slowdown and the global health crisis. So it's always hard to tell what what's causing one but what we see those entirely consistent with that I do think that depending upon which which party is that offers certain industries potentially will be.
Will it will benefit and others they'd be bought as much because given the policy positions of both.
Major candidates that I think that probably at the margin has some implications, but our sense is it. It has contributed to the the slowdown but I think we have to be realistic and acknowledge that other factors probably have privacy a this year than a in a more.
Additional collection here because this is anything.
But a traditional election year and that I suspect.
That was there's clarity about how to who occupies the white house.
And what they are public policy initiatives are the markets will rapidly a just because they always do.
And then once there's you know a new public policy you know roadmap than those deals will be put back under the microscope and some will be green lighted and some one sub wall. So I suspect.
That you know like everything else for the M&A World clarity will be will be helpful and when there was clarity that will probably provide you know some modest tailwind.
That's right Paul Thanks for taking my questions.
Thank you very much.
Yes, we'll consider your question and answer session I'll turn the call back over to Paul Taubman for closing remarks.
But again, we we appreciate everyone joining the call today and their interest in a company.
We do welcome the time when we can be back at our offices conducting this call under more normal circumstances, and we wish everyone that they stay stay safe that they remain well and that Oh, we can do this in a more normal way sooner rather than later, thank you very much.
Ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation you may now disconnect.
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