Q3 2020 Piper Sandler Companies Earnings Call
[music].
Good morning, and welcome to the Piper Sandler Company's conference call to discuss the financial results for the third quarter of 2020 during.
During the question and answer session Securities industry professionals may ask questions of Snake management.
The company has asked that I remind you that statements on this call are not historical or current facts, including statements about beliefs and expectations are forward looking statements that involve inherent risks and uncertainties.
Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the FCC, which are available on the company's website at Www Dot Piper Sandler Dot com and on the FCC website at Www Dot FCC Dot Gov.
Call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP.
Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure there.
The earnings release is available on the Investor Relations page of the company's website or at the FCC website.
As a reminder, this call is being recorded and now I'd like to turn the call over to Mr., Chad Abraham Abraham you may begin your call.
[music] good morning, everyone. Thank.
Thank you for joining our third quarter 2020 call I Hope you and your families continue to be in good health during this difficult period.
Yep showing them in her president Tim Carter, our CFO and I.
I will go through our prepared remarks.
Then open up the call for questions.
Let me start by providing some overall comments on our financial results before turning to our corporate investment banking businesses.
The scale and diversity of our business model.
Resiliency of our employees and deep client relationships have generated strong and consistent results this quarter and throughout a turbulent 2020.
[music] adjusted net revenues for the third quarter of 2020.
298 million.
On a sequential basis and year over year.
A record revenues during the quarter were led by exceptional capital raising.
We generated a pre tax margin of 20.4% and adjusted earnings of $2.38 per share.
[music] year to date, we have achieved impressive results with revenues of 835 million any P.S. a $5.73.
Both representing high watermarks for the firm for the first nine months of the year.
Our operating margin was also strong at 17% for the year to date period.
Well many of the challenges presented by the global pandemic persist corporations and public entities continue to adapt and our clients are consistently turning to our spread bice.
We are raising capital for clients as they consider current financial conditions.
We're helping clients reposition balance sheets and portfolios.
And we are advising clients on how to best achieve their strategic goals in the current market environment.
We are delivering on the investments we have made in the business and benefiting from current market trends.
Which is driving strong growth for our shareholders.
Looking forward, we expect to finish the year strong as advisory revenues start to rebound and our other businesses continue to generate strong result.
[music], turning now to our corporate investment banking results.
We generated total corporate investment banking revenues, including advisory services and corporate financing of 177 million in the third quarter of 2020.
Up 5% sequentially.
Revenues of 482 million for the first nine months of 2020 were up 34% year over year.
The range of our product expertise and the multiple ways. We can assist clients is demonstrated in our year to date revenues with M&A activity generating 44% of revenues equity.
Equity financings, contributing 38% and debt and capital advisory engagements producing 18% of total corporate investment banking revenues.
Specific to corporate financing, we generated 100 million of revenues in the third quarter of 2020, and 208 million during the first nine months of the year.
Both our all time records for our firm.
Capital markets remained very active during the third quarter as strong investor demand.
Using valuations and stable markets field near record new issuance volumes.
[music] activity for us during the third quarter was principally in the health care sector with contributions from financial services and technology.
Our health care team completed 26 transactions during the quarter and served as a book runner on all 26, which reflects the strength of our franchise and the trust clients place in our expertise and execution capabilities.
Within healthcare capital raises were concentrated in Biopharma, one of our areas of strength.
For sub 5 billion dollar market cap companies in Biopharma. We book ran 20 equity deals during the quarter ranking in the top three.
And during the first nine months of 2020, we book ran 43 deals and maintained our top five ranking.
In financial services activity was focused on debt financings as banks raise capital at historically low interest rates and positioned balance sheets for future uncertainty.
We offer a comprehensive a differentiated value proposition for our banking clients, where we maintained nearly 60% market share and debt issuance for community and regional banks.
Technology issuance volumes remain strong in the market and we participated in 13 offerings during the quarter.
On a year to date basis, we participated in 19 offerings up a 138% over the prior year.
We have eight publishing research analysts covering over 120 technology stocks, a 50% increase in coverage since the beginning of last year driven by a significant expansion of our software footprint.
The technology sector is a large fee pool, where we are underpenetrated, representing a growth opportunity for us.
Supported by our recent activity in October we believe that our corporate financing results will remain relatively strong in the fourth quarter.
Turning to advisory.
Our advisory practice slowed in the early months of the pandemic as many engagements were put on hold until business conditions became more clear.
That said, we maintained our market position and we believe Q3 will mark the trough in the cycle.
We're seeing a nice increase in the number of new M&A assignments and older assignments that were Pos have been restarted.
Further active discussions with clients remain very encouraging increasing our confidence as our M&A pipeline builds.
Valuations remain strong financing markets are open with historically low interest rates for debt capital and CEO confidence is building.
We generated 77 million of revenues for the third quarter of 2020.
Down 10% sequentially.
We completed a total of 66 transactions during the quarter, consisting of 31 M&A deals spread across our industry verticals.
And 35 capital advisory transactions, which were concentrated in financial services as the team continues to advise on a high volume of debt transactions.
Revenues for the first nine months of the year were 274 million down 8% compared to an M&A market that was down approximately 30%.
We believe that this demonstrates the quality of our team as well as the breadth and scale of our advisory business.
A key component of our strategy is to drive overall market share gains through accretive combinations and selective hiring and our strong relative performance on a year to date basis illustrates the successful execution of this strategy.
As an example, we've retained our leading position in bank M&A. This year, having worked on seven of the 10 largest bank mergers by deal value in the U.S. and every bank merger in the U.S. within announced deal value greater than 1 billion.
Secular drivers of M&A like innovation, a changing market landscape and lower Gannett growth are driving client activity.
Also pointing to an improved outlook M&A deal announcements market wide increase during the third quarter.
And more recently, we've seen several announcements of large cap transactions.
We also have seen an increase in new M&A deal announcements in our areas of strength, specifically health care financial services consumer and energy.
As I noted earlier, our M&A pipeline continues to build and we expect to see advisory revenues grow in the fourth quarter and continue into 2021.
Before turning the call over to Deb I want to reiterate the importance of investing in and growing our corporate investment banking platform.
Our investment banking managing director head Count of 137 is up 7% from the beginning of the year and represents one of the deepest and broadest platforms amongst our peers.
Just as our strong relative performance market leadership and broad product capabilities are helping us to build client relationships. They are also making our platform a destination of choice for talent looking to best serve their clients.
Our pipeline of hires is robust with several bankers looking to partner with us to help grow our product sector and geographic capabilities.
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 $33 million for the third quarter of 2020 down 18% on a sequential basis as.
As expected equity market volumes declined in the third quarter as the market took a breather from the tumultuous first half of the year.
Early August marked the one year anniversary of our combination with wieden and we couldn't be more pleased with the success of integrating the team onto our platform.
With wins trading expertise and our research capabilities, we are a premier destination for clients.
Our institutional vote ranks continued to improve with clients of all sizes, and we are capturing mind and market share.
On a year to date basis, we recorded 122 million of revenues up 120% from the prior year.
The quality of our research and specialized equity sales distribution are key differentiators for us and supporting our record equity financing activity.
We continue to build out our research platform and based on number of stocks under coverage. We are ranked number one in small cap and number three in smid cap.
And based on the Greenwich Survey and Smid cap portfolio managers. Our sales force is ranked number one in the health care financial and consumer sectors.
We expect our equity brokerage revenues to increase in the fourth quarter as market volumes pick up and there's potential for increased volatility stemming from the upcoming U.S. election.
Next let me turn to fixed income services.
The Federal reserve continues to inject liquidity into the market and its signaled low interest rates will extend into 2023.
We generated fixed income revenues of 53 million in the third quarter of 2020 up 10% sequentially and on a year to date basis revenues totaled 143 million up 145% over the prior year.
We continue to benefit from the synergies of our combination with Sandler by capitalizing on our expanded client base and successfully cross selling the unique product and strategic capabilities of both of our firms.
Oh other client verticals were active in the quarter claims have continued to reposition their balance sheets and portfolios as they.
They adjust their strategies to accommodate the prolonged low rate environment by putting more cash to work and seeking any available yield curve or spread opportunities.
In addition, our market leadership in both public finance and community Bank debt underwriting continues to provide proprietary deal flow that differentiates us with clients and drive incremental secondary sales and trading activity.
We expect our fixed income revenues to remain strong as clients continue to strategically reposition in a changing market.
During a potential positive activity related to the upcoming U.S. elections.
Turning to our public finance business.
For the third quarter of 2020, we generated 26 million of municipal financing revenues down, 14% sequentially and up 21% year over year.
Our public finance business is benefiting from a stable market low yields strong investor demand and market share gain.
We completed 200 negotiated transactions the number two issue or nationally raising 4.5 billion for clients during the quarter.
We saw strong governmental issuance, especially for school districts, where we have market leadership in multiple states.
For the first nine months of 2020, we generated revenues of 80 million an increase of 53% over the prior year.
Through negotiated and private placement transaction, we raised an aggregate par value of 14.1 billion for clients up 83% year over year relative to the market that was up 36% demonstrating significant market share gains.
We expect Q4 revenues to remain strong as market conditions are conducive to new issuance and refinancing.
Now I will turn the call over to Tim to review, our financial results and provide an update on capital use.
Thanks, Bob.
As a reminder, my comments will be focused on our adjusted non-GAAP financial results.
We generated revenues of 298 million for the third quarter of 2020 up 2% sequentially and 47% year over year.
Corporate financing revenues, which hit a record high for our company and strong fixed income brokerage activity drove the sequential improvement while as expected revenues from advisory services and equity brokerage moderated during the quarter.
Revenues on a year to date basis totaled 835 million up 53% compared to the prior year, reflecting the investments we have made through our acquisitions and organic growth from the market leadership, we have achieved in many of our businesses.
We remain well positioned to serve our clients in more ways than ever well generated strong financial results for our shareholders.
Turning to operating expenses.
Our compensation ratio for the third quarter of 2020 with 61% down from the sequential quarter as the result of strong performance and an improved outlook.
Our comp ratio is largely variable the revenues and we continue to manage compensation levels, well, considering investments employee retention and business outlook.
This can drive some additional variability in our compensation ratio from quarter to quarter as we have seen this year.
Our year to date compensation ratio was 63% and we expect that on a full year basis, our comp ratio will end the year near this level.
Non compensation expenses for the third quarter of 2020, excluding reimbursed deal expenses were 42 million, reflecting the continued pause on travel and entertainment as well as lower trade execution and clearing expenses from reduced equity volumes.
On a year to date basis, excluding deal expenses non comp costs were 138 million up 28% over the prior year compared to a 53% increase in revenues.
We expect non comp expenses to remain at or close to these levels in the near term and we will continue to actively manage costs as they are an important driver margin expansion.
For the third quarter of 2020, we generated an operating margin of 20.4% a 270 basis point improvement from the second quarter.
Our operating margin for the first nine months of 2020 with 17% up 240 basis points over the prior year period, driven by the increased scale of our platform and the successful integration of both Sweden and Sandler.
Our tax rate for the third quarter of 2020 was 26.9% on a year to date basis, our tax rate of 23.7% reflects income tax credits recorded in the first half of 2020 related to provisions in the cares Act.
We continue to expect our tax rate will be within our targeted range of 26% to 28% going forward.
We generated $2.38 of diluted EPS for the third quarter of 2020, an increase of 23% on a sequential basis, driven primarily by record revenues and our improved margin.
Diluted EPS on a year to date basis was a record $5.73 up 28% over the prior year, resulting from our strong revenues expense discipline in the accretive impact of our acquisitions.
Now turning to capital our capital and liquidity positions are strong and our leverage remains low for the first nine months of 2020, we generated 103 million of adjusted net income up 59% over the prior year, reflecting our scale and ability to generate significant amounts of cash from operations.
Turning to dividends, given our strong performance and improved outlook quarterly dividends will return to pre pandemic levels.
The board approved a quarterly dividend of 37, and a half cents per share to be paid on December 11, 2020 to shareholders of record as of the close of business on November 24 2020.
On a full year basis, we expect to maintain our dividend policy of returning 30% to 50% of our adjusted earnings through a special make whole dividend paid in the first quarter of each year since.
Consistent with the prior year, we anticipate the payout ratio for fiscal year 2020 to be at the low end of the range.
We are pleased with our strong results for the first nine months of 2020 or combinations with wieden and Sandler of added material scale and operating leverage to our business.
We remain focused on investing in our business to grow revenues and earnings.
With significant opportunity to grow market share across cycles are proven financial performance and leadership across several franchises. We believe we represent a unique opportunity to drive shareholder value over the long term.
Thanks.
I'll now open up the call for questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Once again that is star and the number one.
And your first question comes from the line of Devin Ryan with JMP Securities.
Great Good morning, everyone.
Hi, David.
Maybe to start here on some of the commentary on the M&A outlook, just be great to poke a little bit of a finer point on.
The the.
The tone and for business right now and how it's recovered over the past few months and I'm really just trying to get a sense of whether we're back to.
Call it the pre pandemic pace, we're what feels different today, if were not and just to also deals that you're seeing are the deals that were temporarily put on hold.
And dynamic or are you seeing deals.
For because of potential tax changes.
Come with a different administration to try to get a little more flavor.
Well you guys are seeing in the M&A outlook.
Yes, Thanks Devin.
Definitely think Oh, we're certainly more upbeat about the M&A pipeline and what we're seeing and you know that that really started to change at the end of the summer and.
In September and has really continued and I would say you know as we said it's sort of a combination of both we have definitely restarted some of the deals.
That you know were put on hold but we're also have you know several new pitches. So you know I think I think the interesting question is going to be it was September October has been very busy starting a lot of deals and it'll just be a a race to the finish to see you know how much we get done by December and you know how much gets done in Q1.
Specific to the tax question you know I can definitely think of a few transactions.
That are driven by you know trying to get something done this year, but I wouldn't say that.
The vast majority and then just relative to the are we back at pre pandemic a run rate.
I think its significant significantly improved but not in every sector in in all areas. So no no I wouldn't say we're back.
At the pre pandemic run rates, but but a lot better than than where we've been.
Okay terrific very helpful.
And then just another one here just on potential implications of.
Election next week and to the extent, there's a change administration and obviously people are talking about the potential for a higher tax rate.
Any thoughts around how that could impact the public finance business. It was clearly when we had tax reform kind of.
Big topic of conversation.
And so anything that you guys are hearing internally around potential for changes.
Correct.
The muni underwriting business or.
Rating side as well.
That one I think the main aspect that that impact is really the appetite for municipals relative to other products and so that's where we may have seen some decline historically, although maybe not even as much as we may have anticipated. So while it is part of the discussion around what can be helpful.
For the business going forward I wouldn't say, it's been a dramatic.
Topic that we've talked about but obviously would have some positive impact on the appetite for that security.
Yeah, I guess step Devin I would just add relative to the.
Just a public finance, obviously, we've seen a really a.
Nine months in public finance and in a lot of people taking advantage of low interest rate.
Think theres an argument to be made you know depending on the election year next year could be.
Really big on infrastructure spend so.
Even though a lot of companies have a lot of entities in public entities have refinanced.
Theres certainly an argument that its going to be very active next year with lots of projects and frankly continued low tax rate.
Got it okay.
And then just another one year on the brokerage business.
I think this.
This environment is really validated the business model and the diversification and resiliency of your model and clearly.
Coming into this year with the volatility.
As the investment banking outlook, maybe soured a bit even though it's done.
Done better than people thought.
The brokerage business has been tremendous and picked up a lot of slack here and what I'm trying to think about is.
The fact that you have a couple acquisitions in here it kind of makes the comparisons relative to last year difficult as were trying to think about what maybe a more normal brokerage backdrop could look like to the extent volatility does decline if that's good.
Something we want to make here. So is there any way to think about kind of what the pro forma.
The business has done over.
For the past nine months relative to last year. If you were to include.
The acquisitions in last year, and how are you guys thinking about that.
The potential for that business to potentially moderate if obviously.
The environment improves and some of the other businesses that are pro cyclical continued improve like M&A.
Yeah, I'll take that Devon, and I'll take it in two pieces, both equity and fixed income.
On the equity side, we definitely benefited from the market in Q1, obviously with the extreme level of volatility.
When we originally talked about the combination of really all the business as we spoke to that because there wasn't good historical data to it being somewhere around $130 million business. What I would say is we are seeing less dis synergies than we may have originally anticipated and so I think if you look.
At the last two quarters run rate here. After we got past the volatility of the of Q1, you're going to see something that's a little more normalized I mean to your point will ultimately depend on the level of activity in the market, but just to give you some some sense of that.
On the fixed income side.
We had talked about that's nearly doubling our revenue and had we had somewhere around an $80 million business in 2019 prior to the Sandler acquisition and.
Here too I would say well the market has been very conducive to fixed income business, you're seeing a lot of prepayments refinancings driving cash into our client balance sheets in portfolios and their need to redeploy that trying to go out a little in duration to capture some yield that there.
Losing through that.
Through the refinances and pre payments. So there is a conducive market.
The other thing I would say, though is we have done a lot of work to fully combine a fixed income businesses.
Integrate the trading desks and fully integrate the analytics team so that we're able to capture and leverage that complimentary both products and and skill sets across the expanded client base. So that one's a little trickier for me to determine exactly how much is market driven given what I spoke to versus.
Having the the one plus one equal two but I would say we continue to believe at least as we go into 2021 that we'll see the strength that we're seeing today.
Okay. Thanks, Deb just last one here on thank.
Thinking about operating margins moving forward and we appreciate you this quarter, maybe the comp ratio is a little bit.
Below normal as the outlook for the full year improved so there were some adjustment there, but the firm generated over 20% operating margin. So I'm trying to think about kind of where.
That margin can go as 20% a level that you potentially could be operating at.
As we look out and if you were to assume the revenue backdrop remains healthy.
And what I'm getting at is the mix of business may shift around a little bit and so.
The bigger driver probably is on the comp ratio here I'm trying to think about.
And can the comp ratio down from the 2020 level is around 20% operating margin, maybe aspirational type level or is that a reasonable level that could be operating at a better revenue backdrop.
Yeah, Devin maybe I'll take that you know I think you certainly see the leverage so that we can get in the business.
You know as we did this quarter I think it's also informative to think about it from a year to date basis and you know at a at a 17% level you know that that margin. As you know has continued to move up over the last several years, but I do think if you look out a couple of years.
20% margin is where we're where we're marching towards.
And I think you're right in terms of thinking about the comp ratio I mean for this year, yeah, we're we're likely to end within.
Our guided range.
But you know if things began to normalize you know, we're always thinking about investment and and what we do through the comp ratio, but there is an ability I think if things normalize that you can think of next year.
Maybe moving towards the lower end of that range and you continue to get some some leverage through the comp ratio, but that's always going to be a little dependent on what we're doing from an investment standpoint, and how we think about about the business, but yeah getting to a 20% mark.
Margin is sort of where were yes.
Yes, and I would just add I would just add Devon when we did.
The Sandler deal and we announced the deal we certainly felt like a conservative range for our operating margin was.
17% to 19% and we thought it would be aspirationally to get to 20% I definitely think in this current operating environment with some of the expenses that aren't going to go back and the fact that we're seeing a bit of an increased scale. You know I think when we did when we did sandler.
We knew we'd be real happy if we were having $300 million quarters, which weve.
I'm close to the last couple of quarters. So I think all of that combined has certainly moved in our thinking.
That we should have several 20% margin quarters. It may take a year or two for that to be consistent and show up on a full year basis, but yeah, we have definitely moved to that target in.
Okay.
Great appreciate all the color guys I'll hop back in the queue.
Thanks, Don.
Your next question comes from the line of Michael Brown with KBW.
Hi, good morning, everyone.
Hi, Mark.
So capital raising has just remained red hot and it really sounds like it.
Two years, so I think the challenge is really how long can it go and so what I'm interested in hearing from your perspective is.
What is what does kind of the pull their case here.
That could cause levels to stay so.
Stay where they're at or even accelerate and what could cause it to just kind of fall off.
From here.
Yes, I think for for US it is going to be very industry specific I mean, there is no question that the amount of stimulus in capital in the fact that you know people.
People don't have great places to invest the money it is definitely pushing money in the equity markets and.
Pushing valuations for US specifically you have to you have to look at where we're driving a lot of that business by far the two biggest areas.
Areas for us and financing.
You know number one by a vast vast margin is health care you know thats. The vast majority of our EPM revenues. So you'd have to have a perspective on the health care markets I think we've said for a while.
You know, there's a long term trend with.
A lot of new technology, and things going right in the biotech market and investors.
That of hail that made a lot of money still have a lot of dry powder. So we we in the healthcare market and within innovation certainly see that that continuing if I was to paint a bear case, you know sometimes when you get a lot of new regulation in health care. If there is a lot going to be tons that comment.
Larry on drug prices.
Tons of regulation.
And you know you see.
Healthcare stocks go down you know that's not going to be good for our healthcare financing business. The other part of our financing business that is just doing incredibly well is the.
Lots of small and medium community banks are financing and in this capital wave, they're doing it through a debt financing and we have high share and you know we certainly still think we're in the middle innings for that and I mean, there's there's lots of banks that haven't refinanced. So those are the two biggest pieces.
For US you know, there's other markets, obviously technologies fantastic and text docs and software stocks and new Ipos, we participated but that but that's a big opportunity as well. So yeah, I think people like to say well Hey is this just a financing bubble and is a one quarter or two but I do think with.
A stimulus and capital backdrop.
This potentially has some legs.
Yes, great I appreciate the color Jack.
One does for your fixed income trading business I guess, what I'm trying to think about is the operating backdrop for fixed income next year and.
You talked about the fed committing to lower rates for 23 years. So how does how does that lower rate environment.
For for you and your your mix on the fixed income side and then.
As we think about the transition away from from library or do you expect that to drive elevated trading activity in 2021.
So first of all just on the overall lower rates.
I think this really.
Going to be a function of as I was speaking to before the amount of refinancing and prepayments on the mortgage side that continue to come in and so if these rates stay low we do expect that to continue which obviously also it was a function in the capital raising side as generally speaking to on the corporate debt and also in our municipal doesn't.
Yes.
Which tends to have a a helpful impact on the overall training trading environment, when you're having a strong issuance rather.
Relative to LIBOR I think for our business, specifically I don't see it having a huge impact in our trading activity going forward. So I guess, that's what I would say about that not a huge impact.
Okay, Great I appreciate the color on that.
I wanted to ask about capital return, so going to depend on it.
You guys reduced dividends.
Very conservative action at that time, and as a result of really exceeded expectations Youve now brought them back to where they were pre coded.
So one how should we think about your capital return plan going forward and then too.
From our seat given the difference between the adjusted net income and the GAAP net income.
For Marci, how should we think about what your capital return potential is in terms of buybacks and dividends, we're thinking about like a payout perspective.
Yes, maybe I'll start and let let Tim take the second.
The second part Mike I mean, our.
Our view has sort of returned to.
Where we where we really need all of the tools I think at the scale. We are in with the cash we're generating we certainly look at buybacks.
We look at the regular quarterly dividend, we look at the.
Special and then obviously, we're going to keep trying to deploy.
Capital through investing and.
And acquisitions and there is no question had we.
We used a lot of excess capital with sand.
Sandler and balance.
And so certainly had put a lot of cash.
To work, there, which which.
Probably put a little pressure on our buybacks and other ways, we were going to use capital all of that being said now we're back to generating a lot of cash and I think in hindsight you could criticize you know should we have got the dividend I think we were just.
Looking at that in a point in time and being conservative and so I think our perspective now is we need all of the avenues to deploy cash.
It will depend on what the bigger opportunities are on the acquisition and investment side, but we'll continue to look at the rate of our quarterly dividend. We we've said all along we're going to continue to pay the special and we will be active with buybacks yes.
Yeah, and Mike maybe just on the GAAP versus non-GAAP.
Obviously.
The expense that that's coming through from a GAAP perspective is.
Significantly related to all of our acquisitions and that that is really a non noncash.
Amortization charge, whether its amortization of deal consideration or amortization of intangible those those are the primary components of that so we really think about that sort of that one.
Realty that to deploy capital based off of those.
Based off of our adjusted non-GAAP results, so that really becomes the driver that's how we set the.
The dividend payout of 32.
80%.
And those items are taken into account when we think about it from a GAAP perspective, So you know.
Again, yeah, it's really the the folks on that cash generation, which generates the capital that we've got the ability to deploy it.
Okay, great so sticking with the 30% to 50% payout ratio relative to the adjusted earnings going the right way to think.
About it.
And then just a quick follow up on the on the non the non-GAAP adjustments so.
With the acquisition of the Sandler imbalance and weed and I guess those extensive if I remember correctly a lot of the.
Restricted stock consideration in that retention rolls off over I think the average was roughly three years or so.
Can you just remind us that hey, that's that's right and then as an intangible asset amortization.
How does that tend to trend down over the next two years or so just want to make sure kind of.
Have the pieces correct there yeah.
Yeah, Mike So you're right in terms of the deal consideration yeah, we've got things going out sort of three to five years.
You know a lot of that is more heavily weighted.
Over the first three to four years, so so you'll see that come through in a little bit more about.
Recurring way over that time period, I think I'm on the intangible much more specifically.
That can become a little bit of a longer term, but but it's much more front end weighted so you see a significant cuts.
A component of that come through in the first two years.
And then it drops off significantly after that.
Okay, Great, Yes, Mike I would just say that is that another way over the next four or five years, you will see that they the GAAP GAAP and non-GAAP converge.
Right, Okay, Okay, great and just one thing on capital return just to kind of close the loop on that.
One thing I guess, we didn't talk about is potential for other acquisitions is that something that now you've you've got integrated.
Sam they're in balance and we didn't acquisitions would you consider going back out and looking to make any other bolt on acquisitions here or are you still at the point, where you are.
Trying to get the synergies out of each of those acquisitions and feel comfortable with your strategic mix.
Yes, I think I think what we say what I said last quarter, which is.
Frankly, theyre, all going quite well we think.
Having been pretty active that we know how to integrate acquisitions, we know how to create opportunities.
Based on on the acquisitions were really pleased.
With the results.
Lastly, the we've got a good track record here now a few quarters with Sandler and weed and results all of that being said, we're conscious of the fact that we did a few big things and so I think it's unlikely in the next couple of quarters.
For us to look at larger transactions, but we're going to continue to be upper opportunistic and I think like we've done in the past we will continue to look at smaller boutiques and things that give us.
Product expertise industry expertise places, where it's just not going to be possible for us to grow fast enough organically and so I do think I will continue to be active and I think just given our relative strength and performance and and revenue and cash generation you know, where we think we're in a position.
And strengths. So we do think we'll be active over the next six or nine months, but I think it will be on you know.
Some of the smaller stuff and Mike maybe just as a follow up to that related to the dividend payout ratio, 30% to 50% I mean, we certainly taken into consideration what we're thinking about from a from an acquisition perspective, I mean, Jeff referenced it.
On your first question around.
All of the levers I mean, it's the dividend thats the buybacks and it's the ability to tap capital to do acquisitions. So we think about all of those.
In combination.
When we set some of these levels.
Okay, Great Thats helpful clarification.
Thank you for taking my questions.
Thank you.
And your next question comes from the line of Mike Grondahl with Northland Securities.
Hey, good morning, guys and congrats on the quarter.
Three questions I'll, just maybe ask them all.
One.
The M&A pipeline today.
How does that kind of compare to maybe the three year average are you kind of sitting at 60% of that 90% of it.
Secondly, I saw your recently, let us back deal in the financial services area.
What's your kind of thoughts on that area going forward and.
Any thoughts on maybe a healthcare deal or an energy deal.
And then lastly.
Clearly, there's less travel going on with all that.
Do you think that's affecting the business at all do you think you didnt get on any deals be comfortable lack of travel.
So those three if you don't mind.
Yeah, and maybe maybe I'll just.
I'll just take those out an order relative to the pipeline.
It's growing a lot the last couple of months as I said I don't think it's back to sort of where we were sitting in January whether that's 80 or 90%, it's probably close with which certain industry teams, it's certainly back or even greater uncertainty in certain industries.
You know, it's not necessarily at full capacity one of the areas we've.
You know, we're we're pretty heavily weighted in certain of our industry teams is private equity and I would say in Q2, we just weren't seeing a lot of that come back in Q3 activity has really picked up private equity is very active looking at.
Transaction, so it will be interesting.
We're conscious of the fact that.
A lot of this will depend on what happens with the virus and shutdowns and travel and how private equity.
I looked at doing deals the next three months, but if the last couple of months or event or an indication and we have a couple of months like that I do think we'll be back.
Back at at a full M&A pipeline relatively early into next year.
Secondly on the spec question, Yes, we did us back in financial services I think you know this but you know this has been an incredibly active Europe, we do not have a history of doing a lot of us back transactions that were much more active now the market's become much more mainstream.
You look at the investors in this backs that has certainly evolved and the list is much.
Longer some of that's just being driven by there is so much extra liquidity and cash that say, it's viewed as a good place.
To put your money. So I do think that parts of that market are here to stay.
Where we're going to participate is where we really believe in the management teams, where we have experience with those teams and in sectors that we know incredibly well. So you sort of said what do we look at energy and healthcare, Yes. We did this one in financial services. So those are the logical places.
Where weve got that expertise and those relationships with the team that we will be active.
And the last question. Okay. The last question was travel yes.
Yes, that's still at really low levels I will I will say in Q4, we are definitely seeing more and more bankers more research analysts more sales people travel.
Travels certainly not everybody and certainly not every client base is sort of an open to that.
I think I've said this before I do think there is roughly half of our travel that that will only come back in some capacity or some fraction and then some half of our travel that will come back in a big way I had a couple of conversations with.
Certain bankers this week.
They were traveling every week and having no problems with clients are wanting to see him and felt like that was a real competitive advantage. So we're obviously staying very flexible with what our clients want what are what our partners are producers want to do.
But as I said I don't think that will expense will come back.
The way it was I think there will be permanent savings, but I don't think our current run rate is going to stay where it is.
Got you okay. Thanks, a lot.
Thanks, Mike.
And we have no further questions on the phone lines I'd like to turn the call back to Mr. Abraham for any closing remarks.
Okay. Thanks, operator, we're very happy with our results through the nine months and we're encouraged that we're seeing increased advisory activity. We very much look forward to updating you all in Q4 on and our full year 2020 result.
Early next year. Thank you everyone have a nice day.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
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