Q2 2020 Piper Sandler Companies Earnings Call

During the second quarter, we produce strong results driven by our Capital raising and brokerage businesses, which offset the declines in m&a activity adjusted net revenues are robust at $293 million dollars up 19% on a sequential basis. We generated adjusting earnings of a dollar ninety-three per share with a 17.7% pretax margin.

Performance for the second quarter and year-to-date has been strong on both an absolute and relative basis as we have captured market share gains in many of our businesses off the corporate development moves. We have made over the last twelve months have provided significant franchise and financial diversification and enhanced our scale and durability across the firm record revenues for the first half of 2020. Exceeded $500 up 50% year-over-year.

the strength

University of our business model has greatly benefited our clients franchise and shareholders in 2020.

The Financial Services Group continues to perform very well exceeding our expectation in terms of revenue for the first half of 2020 through our combination with Sandler. We knew we were partnering with the market leader what has been equally impressive is the resiliency of the franchise during challenging markets their broad range of capabilities deep relationships and sector expertise has generated consistent performance to varying Market Cycles.

We certainly recognize the challenges the second half of 2020 presents as the timing duration and path to recovery from covid-19 and its related effects remain unclear. We believe we are well-positioned to continue benefiting from active equity and fixed-income capital-raising as well as strong brokerage activity. Our advisory practice slowed appreciably in the early months of the outbreak as many engagements were put on hold until business conditions became more clear. We expect to continue to see the effects of this month in the third quarter.

However, the gradual reopening of the economy combined with stabilization and the debt and Equity markets has resulted in an improvement in sentiment towards m&a if these Trends continue we expect to launch a number of assignments in the coming months.

Turning now to corporate Investment Banking results. We generate a total corporate Investment Banking revenues, including advisory services and corporate financing of $169 off the second quarter of 2020 up 24% sequentially.

Revenues of $305 million for the first half of 2020 were up 33% year-over-year.

The range of our banking platform and products was apparent in the first half of 2020 with corporate financings making up 36% of total corporate Investment Banking revenues compared to 19% for the full year of 2019.

Specific to corporate financing, we generated $83 million of revenues in the second quarter of 2020 an all-time record for the quarter and $109 a year to date basis.

Capital markets were extremely active as both public and private companies look to strengthen their balance sheets as a ballast against the uncertain Outlook.

Our Capital raising performance has also been strong on a relative basis as our revenues on Equity offerings for sub five billion dollar market cap companies are up 144% off for the first half of 2020 versus the people in this market being up 46%

Healthcare

Please we're especially active in the corridor as interest in this sector has accelerated valuations are strong and companies are seeking more Capital than ever to speed the development of Med Solutions. The strength of our franchise allowed us to be a very active participant in the market for the first half of 2020. We booked ran 33 Equity deals for healthcare companies with sub five billion dollars of market cap ranking 7th and raising four point five billion dollars of capital.

Highlighting the strength of our Healthcare franchise across the firm. We served as bookrunner on over 95% of the IPOs and follow ons we under wrote this year. We have one month largest and strongest Platforms in the industry with close to a hundred and forty professionals, including 24 managing directors in banking and Equity Capital markets and 13 publishing analyst covering over 200 healthcare companies.

We've made Investments to continue broadening this franchise into important sub-sectors like biopharma and our performance for the quarter and year-to-date is a result of consistently strengthen our Healthcare platform. Our financial services group was also active in the capital markets during the quarter completing 21 debt and preferred stock offerings for banks and financial services companies. This team continues to lead the market for Community Bank issuance.

We believe that corporate financing markets will remain strong in the third quarter as July has been another very strong month.

Turning to advisory.

We generated $86 billion dollars of revenues for the second quarter of 2020 down 23% sequentially in total. We advised on 55 transactions with an aggregate value of 7.8 billion dollars. Our financial services team was the largest contributor as they completed several significant m&a deals in the corridor the team ranked the number one advisor in bank and Thrift m&a based on both the number and value of deals announced in the market for the first half of 2020.

Announced m&a activity market-wide for the second quarter declined significantly on a sequential basis. We expect our advisory revenues to decline in the third quarter reflecting the pause on a a judgments experienced in the early months of the covid-19 prank.

As we look ahead we are mindful of the challenges in our markets and for our clients despite these near-term challenges. Our long-term strategy of building enduring market-leading franchises wage has not changed.

Now I will turn the call over to Deb to discuss our Public Finance and brokerage businesses.

Thanks, Chad. Let me begin with an update on our Equity brokerage business. We generated revenues of $41 million for the second quarter of 2020 as Equity Market volume and volatility remained calm needed from historical levels, which drove solid performance in the quarter although off 15% from our strong first quarter revenues clients continue to seek out trustee relationships to find liquidity during these digital market conditions and our reputation for Premier trade execution drove our results for the quarter and first half of 2020 year-to-date. We traded 6.6 billion shares up 73% off from the volume traded in the second half of 2019. The breadth of our client base allows us to cross a significant portion of our cash trades resulting in minimum Market impact, which is a significant difference for us.

Equity brokerage Revenue

It's for the first half of 2020 were eighty eight million exceeding the full year 2019 results demonstrating the success in integrating. We'd and onto our platform and the trust placed in Us by our clients.

We expect our Equity brokerage revenues to decline in the third quarter as we have seen volatility and volumes decline in July and the market typically experiences a summer slowdown as we look ahead. We are excited about our prospects and believe we are in the early stages of demonstrating the full capabilities of our larger platform across the breadth of our account base, the combination of top-ranked research trading in capital markets capabilities creates a premier client destination and indications are that market share and voting ranks with clients have meaningfully improved.

Let me turn to fixed-income services.

The Federal Reserve injected massive liquidity into the market towards the end of March which helps stabilize markets in the second quarter. We generated revenues of $49 million in the second quarter of 2020 of 18% Sequentially our continued focus and Define client verticals combined with the strength of our product expertise analytics and Deep Quiet relationships is paying dividends this Dynamic is off driving a strategic shift towards a more advisory Centric model our financial services team contributed strong revenues as they leverage their deep expertise with banks to advise clients and managing the dislocations in the market. This group is adapted providing deleveraging strategies for their banking clients helping reposition bank balance sheets to maximize interest yields and manage risk while increasing Reserve positioning.

We are seeing strength across many of our other client verticals as well, including our public entity clients as we work with them on developing the optimal portfolio structure giving covid-19 budget challenges bath.

We expect our fixed-income revenues to remain strong as clients continue to reposition in a changing Market.

Turn into our Public Finance business for the quarter. We generated $31 million of Municipal financing revenues up 36% sequentially and 73% year-over-year our Pub business benefited from a stabilizing Market low-yield strong investor demand and market share gains.

We completed 223 negotiated transaction. The number one issue or nationally raising five point nine billion for issue or clients in the quarter. We saw strong governmental issuance, especially for school districts, which is a strength of our franchise additionally higher grade taxable refunding is in the health care and higher education space were active in the quarter taking advantage of the low-rate environment often. Does your demand for high-quality paper remains strong with investor inflows into Municipal funds.

But the first half of 2020 we generated revenues of 53 million an increase of 75% over the prior-year to negotiated and private placement transactions. We raised an aggregate part of 9.5 billion for clients up 98% year-over-year relative to the market that was up 34% demonstrating significant market share gains this activity drove a New Age movement in our Market position as we ranked 5th based on aggregate par value of negotiated and private placement issues are highest-ranked ever.

We expect Q3 Revenue.

is will likely moderate from these levels with that said higher-yielding specialty sector issuance has have been noticeably absent from the first half further stability in market and demand for higher-yielding if she could provide upside now, I'll turn the call over to Tim to review our financial results and provide an update on Capitol use

Thanks Deb has a reminder. My comments will be focused on our adjusted non-gaap Financial results.

We generated revenues of $293 million for the second quarter of 2020 up 19% sequentially and 80% year-over-year. The sequential increase was driven by rep corporate financing activity and robust performance and Municipal financing.

Our brokerage business has continued to remain strong while as expected revenues from advisory Services moderated during the quarter.

So the first half of 2020 revenues totaled $538 million up 56% compared to the prior-year reflecting the Investments we have made in the business through our Acquisitions of Sandler and leading off the diversity of our combined platform has positioned us to serve our clients in multiple ways and generate solid results for our shareholders.

Turning to operating expenses for the second quarter of 2020 was 63.5% down 130 basis points from the sequential quarter.

Although our comp ratio is largely variable to revenues we continue to manage compensation levels while considering Investments employee retention and business Outlook.

Non-compensation expenses for the second quarter of 2020 excluding reimbursed deal expenses were $44 million down eight million on a sequential basis due to the significant decline am traveling entertainment as well as lower trade execution and clearing expenses non-comp expenses for the first half of 2020 excluding deal expenses were Ninety Six Million.

As we continue to actively manage non-compensation expenses and travel and entertainment is limited. We expect costs to remain at these levels in the near-term.

For the quarter, we generated an operating margin of 17.7% demonstrating the scale and operating leverage in our business at higher Revenue levels.

Operating margin for the first half of 2020 was 15% and increased 110 basis points of the first half of 2019.

This increase was driven by the scale of our platform and cost synergies realized through the Whedon and Sandler combinations despite overall challenging conditions.

Or tax rate for the second quarter of 2020 was 30% We recorded income tax credits in the first quarter related to Provisions in the cares act enacted by the federal government in March of this page keeping our improved results. We reduced some of these tax benefits in the second quarter, which increased our rate.

Year-to-date basis or tax rate was 21.3% We expect our tax rate will return to our targeted range of 26 to 28% in the second half of this year.

We generated $1.93 of diluted EPS for the second quarter of 2020 an increase of 30% on a sequential basis driven by higher revenues and an improved margin for the first time the 2020 diluted EPS was $3.35 up 18% Year-over-year reflecting are strong results in the accretion impact of our acquisitions.

Now turning to Capital or capital and liquidity positions continue to remain strong and our Leverage is low for the first half of 2020. We generated $60 million of adjusted net income be reflecting our scale and ability to generate meaningful amounts of cash from operations.

We're focused on only carrying inventory or clients need liquidity within our areas of expertise. We reduced trading inventory to 417 million at the end of the second quarter down 20% from the first quarter going forward. We expect our trading inventory to remain near these levels turning to dividends the board approved the quarterly dividend of $0.30 per share to be paid on September 11th, 2020 to shareholders of record as of the close of business on August 28th, 2020. Although the quarterly dividend is higher on a sequential basis. It is often compared to the quarterly dividends paid in 2019.

We continue to see the benefits to our business in preserving optionality with how we deploy capital in this environment and we will continue to adopt a conservative posture until we believe there is a sustained recovery.

Overall, we are pleased with our results for the first half of 2020. We expect the ongoing pandemic will continue to affect certain areas of our business during the second half of this year that said we will continue to adapt to the environment and focus on maximizing shareholder value over the long term.

Before going to Q&A. I'd like to turn the call back to Chad for a few additional comments.

Thanks Tim. I am encouraged by our first half results and our ability to serve clients in multiple ways to our broad product offerings.

As we look ahead July was another very strong month for corporate financing. But we also expect the near-term environment will continue to be challenging for m&a activity.

Our intense focus on serving our clients supporting our employees and our broader communities just as we have done over the course of our hundred and twenty-five year history will help us navigate through this book certainty.

We believe the strength and durability of our platform positions us for Success over the long term.

Thanks, and we can now open up the call for questions.

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad again. That is star one to withdraw your question. Press the pound key. We will pause for just a moment to compile the queue and a roster.

Your first question is from the line of Devon Ryan with JMP.

Great. Good morning everyone morning.

So maybe to start with some of the m&a commentary and appreciate do the detailed Outlook to the extent. We do see kind of a continued recovery here off and economies do reopen. I know that there's a lot of ifs there but to the extent that does play out and you know, the deals come to Market, you know, is is Chad you mentioned in the remarks month is kind of the best case that you're the fourth quarter you deals are announced in potentially or completed. So forth quarter could start to get back to something more reason after slower third quarter or you know, is that just you know, wishful thinking and and kind of really pushing into twenty Twenty-One just because it takes time to actually execute on the transactions and get to a if the event I'm just trying to think about if we were to you know, I know there's a lot of scenarios here, but if we were to play through the scenario of kind of a continued maybe slow reopening with that could imply for the Dead

Okay.

Yeah, thank seven. Certainly the last four or five weeks. You know, we've seen you know, more transaction start more positive conversation. You know, what I would say Obviously we benefited in Q2, you know, we still had the tail of some closings of transactions particularly financial services that have longer, you know time to close and so some deals that were announced at the end of the year and beginning of the year obviously closed in Q2. So, you know, as we said we we do continue to think advisor revenues to be down in Q3, I do think we'll get we'll start to get some of these new transactions we've started in Q4, but you know, our expectation is that you know, both Q3 and Q4, you know will still be fairly tough for advisory, you know, while we're starting some transactions in every Industry Group, you know, it's going to take a while for it to be at a full clip.

Okay, understood. Thanks and maybe one on the just overall Public Finance kind of underwriting and creating it was active in the. Home of some detail around the themes there if you could just to to think about the fixed-income business, um as well kind of heading into the back half of the year, you know volatility the market has subsided a bit and yet you know activities is remained and I'm pretty healthy and demand seems to be good. So I guess I just want to dig in a little bit more around what else is is home. There's any way to kind of calibrate, um, you know, it's feels like maybe that business remains more elevated than it was heading into the pandemic but maybe not quite as strong as the second quarter. So there's any way to to kind of frame that a little bit more as well. That would be helpful.

Yeah, I think you characterized it pretty well. They're driving in terms of what we're seeing and

We do continue to see really strong activity from clients. And while volatility is down there still a lot of uncertainty in the marketplace. And so as we have that continue to shift from more of a a call it a product delivery to delivery of advice and strategy, you know bringing together the Sandler O'Neill component into our platform were we're seeing again more of a focus on this advisory for clients. We mentioned public entity clients. There's others who are really seeking advice and that seems to be driving continued connectivity and it continued change in repositioning of portfolios. The other thing I would say is we are benefiting from the breadth of this larger sales force and the ability to find product and liquidity for clients with the combination of Sandler and Piper. So that's also I think helpful in terms of driving continued revenues.

Okay. Terrific. Maybe just the last one here for Kim just on the non-compensation. I appreciate you know, the commentary around expectations to the extent that we remain primarily in a remote work environment that you know expenses could remain in the similar ZIP code here but we look out obviously, I think every company's had to evaluate their expense truck or just with the view, you know, whether it be a few months ago that it could be a very difficult Revenue backdrop and you know things have I think evolved in a better tone but as your banking about the expense structure and and also just how efficient The Firm has been in, you know, this virtual environment are other things that you're looking at or or feel like could be opportunity just over time just as you know, whether it be real estate Footprints or ability to do certain things virtually that historically, you know, you weren't doing I'm just curious if there's dead

Any kind of structure will thoughts around expenses, that could be a benefit coming out of you know, this very difficult. Yeah, definitely, you know, I think there are a lot of those types of things that you think about particularly on, you know on space and and and real estate. I think, you know, we were sort of moving down a path of of obviously integrating off Sala dating some space already, you know, particularly in in New York with with, you know, the the previous hyperspace and Sandler space, you know outside of that obviously, there's you know our locations where we've got longer-term leases. I think you know over time we will continue to evaluate that and I do think you know, the, you know, the current environment and how people are performed remotely gives you some confidence that you could you could make some different decisions, but I I think that all happens probably over over a longer-term. Than than anything that happened sort of here in the in the near-term. Yeah dead.

Maybe it's Chad. I'll just add you know, three sort of examples that I think will probably have some structural change, you know, and I and I used to be a two-week full project that you know flight had tons of different cities. And you know, now we're we're doing the road shows in a quicker fashion in a virtual way. I you know, I imagine there will still be in pursuit of appointments in New York and Boston but the sort of full two weeks, you know, super expensive long road show, you know, I I can't see that our research analyst Tuesday spend a ton of time on the road with investors and will I think some of that will come back we we've certainly heard from investors that a lot of the virtual events and things were dead.

You know doing are working.

And you know the last you know, we spend a ton of money on conferences and in-person events. And again while I think some of that will come back, you know, not all of it will and so I do think there needs to be some pretty big structural opportunities there.

Okay, great. Actually if I can sneak one more in here just looking at some of the revenue Trends already in the third quarter. So we look at obviously the investment banking data that's out there and it looks like equities markets to started on a very strong note and um, you know, obviously had a very good second-quarter. I'm curious just in terms of thematically, um, you know, the the backlog trends that you're very sick in healthcare and there's a lot of activity there and you know to kind of overall market share gains. Does it feel like there's just activity getting pulled forward the windows open up out of the election which could create some Market volatility definitely uncertainty what's driving that and just kind of the the tone, you know, as you think about kind of the back half of the year or you know, I'm just giving the what we're seeing is very very strong July at least from from the outside.

Yeah, no, obviously just we're we're in a spectacular time for healthcare investing. You know, you've seen just record inflows. I would say the funds have met a lot of money. There's tremendous investor interest. So, you know was great and you know, like we said, you know July has started off strong I would agree, you know with with the election coming up, you know that there are companies because of the markets so strong just taking advantage of capital-raising now, I do expect that to slow by the time we get to Q4 but there's just a lot of really good companies and frankly. There's been a lot of real life successful IPO. So you know, many of those companies will look to follow ons as well. So we're we're very encouraged by you know, what we're seeing in the health care Market we record

Dies it's it's obviously a good Market. But you know, we've also gained some share, you know, this is this is a business we've been in for a long time, but we've really continued to invest the last three years and and we think we're seeing the benefits of that.

Okay, terrific. Well, yeah, I think that speaks well to the diversification of having a number of Revenue stream. So thanks very much and we'll talk soon.

For next question is from the line of Michael Brown with the KBW.

Thank you operator. Hey, good morning. Everyone. Hi.

So yeah, just wanted to kind of parse through some your comments and just make sure I've kind of got the Outlook kind of summarized here. So, you know, it sounds like advisories off the little side quarter and that's you know, certainly that goes what we're hearing from really all of your peers brokerage sounds like it'll be a little bit softer as well not all that surprising given the volatility volume that we've seen public Financial still pretty good but they're going to be probably lower than the second quarter and then he's yeah continuously very strong. So I am against that backdrop. Obviously you got a tough kind of, actually given the strength in the second coil. How do we think about how the compromise you could play out next quarter month for for the back half of the year?

Yeah, like you know, it's I guess as we think about that, you know, we've you know.

Through the first half, you know really tried to think about you know, what the Outlook is, you know consider retention, you know, we've done some things to invest in in in the business office and you know, my view is that you know, we were higher in in the first quarter. We've seen it come down to 63 and 1/2 in in in Q2 and that you know, we're we're likely in a sort of that same range 6263. I would think you know for the second half so, you know, that's that's still a little elevated from you know, what what we've talked about in the past. But you know that does, you know take into account sort of what we've done, you know in the in the first half and and how we think about business Outlook in in in in the second half

And my I guess the the one thing I would add is.

You know, one of the challenges is we just don't have as much long-term visibility in all of the financing businesses. Both our our debt and preferred business for financials our Healthcare ECM business our page Finance business. Obviously, they're all very very strong now and continued to be strong in July. It's just we we don't have three four or five months visibility those transactions come come together. And so clearly if the financing markets stayed strong, you know, we could make up all of the m&a shortfall but we we just don't have that should have that visibility.

Okay, great. Let's that's there like to to just follow up on this quarter. So could you just expand on the board's decision to do essentially kind of reverse course following the last quarter and then it's kind of Bring It Back obviously not back to where it was prior to the reduction. But uh what kind of drove that change why not. Just give it, you know, you just talk, you know certainly is pretty uncertain as we look forward. Why not. Just kind of keep it at the $0.20 level a new like a, you know a special true up at and thanks.

Yeah, so I I think Mike we we mentioned on our last call we're very committed to sort of, you know, the range we've had of, you know, returning Thirty to fifty percent. We said this year's would be towards the bottom end of that thirty percent. And so yeah, we we do anticipate having our special in in and I think just versus having a much bigger special. We're giving more of it back in the quarter, you know, our our preference has always been to give more back in the corridor. So we're just trying to find the very conservative balance and frankly that was pretty easy to do and so, you know, we we just raised the quarterly dividend and and we do think we'll have the the special at the end of the year as well.

Got it. Okay, and if I can just follow up one more on that kind of a capital allocation. So in April you closed on the the balance transaction and now, you know, the Samsung S8 has been an integrated you seeing any opportunities out there that that kind of kind of keep your interest on the Acquisitions side or their boutiques that way, you know, you could continue to look to to acquire and and if that's the case, I guess where would you be looking to to grow on the margin?

Yeah, so I I think you know, we I think we've proven we can integrate, you know, really good specialty expertise. We've had a lot of success with that, you know, so I think we do intend to continue and I do think you know, this environment creates opportunities. I mean, there are certainly folks that are only focused on advisory in certain sectors in certain geographies in certain products where you know, it's it's going to be a tough six nine month road, but that doesn't mean it's not a a good advisory sector. So we may we are seeing a pickup in that, you know obvious areas for us which have been consistent, you know relative to products. We're you know, under-represented in certain parts of restructuring. So that makes a lot of sense. We've talked about continued expansion in Europe where we're still underrepresented. We've talked about, you know relative to our side still be dead.

The represented in the tech Market, you know, so so there's lots of places we continue to look and I am encouraged by, you know recent conversations.

Great. I appreciate it. Thanks.

Thank you.

Again to ask a question, please. Press star. Then the number one under a telephone keypad. Your next question is from the line of my cat Grendel with Northland.

Yeah, thanks guys and congratulations on the quarter a bunch of my questions have been asked and answered but maybe Chad. Is there any update or developments. Need to call out in the other vertical industrial consumer Tech energy anything you want to share their? Yeah. Yeah. So I think that obviously in huge to the vast majority of the strength came from you know, Financial Services by far led the way with the advisory business and sort of the debt and preferred issuance Healthcare was incredibly strong in ECM, which we talked about. Most of our other segments are heavily advisory focused and in you know, Industrials and particular faith in consumer, you know, those are businesses where you know, there's a lot of private Equity sell-side transactions and you know across all our verticals even Healthcare, you know, all of that.

Stuff has slowed. So, you know, they don't have as much Diversified product mix. So it's certainly wait softer than the other segments in a you talked about energy. We are seeing, you know, there's obviously tons going on in the energy sector a lot of recapitalisation a lot of restructuring a lot of rescue financing and said, you know, we we are adding, you know, lots of mandates to the backlog there. It's a difficult Market it'll depend on you know, how many of those transactions we can get off but you know, we we are we are starting to see some green shoots of opportunities in certain types of transactions in energy.

Got it. Great. And then just lastly, you know, you talked about an advisory. There's good discussions going on and you think you're going to get some mandates but it's a little bit bath dependent. Do you think is there anything you can point to is it just a little bit more stabilization in the next month or two or what do you think triggers those? Yeah. So, you know, like I said, I mean, you know new conversations and are sort of process is, you know, april-may, you know, it really ground to a halt so we started some stuff in June we started more stuff in July, but that's still on a relative basis. You know, that's not that's not broadly across every sub-sector. And so I think you just you need continued confidence, you know for the strategics you need continued CEO confidence for the private Equity firms dead.

you need some continued Improvement in the debt Market, you know a lot for a lot of the private Equity sales that are leveraged, you know, we've certainly seen interest from the office and demand from the debt markets terms aren't certainly the same as they were pre covid-19 r

Got it. Hey, that's helpful and congratulations. Again. Thanks guys. Thank you. Thanks, Mike.

There are no further questions. I will turn the call back over to mr. Abraham.

Okay. Thanks everyone. We look forward to updating you again next quarter. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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