Q4 2020 PJT Partners Inc Earnings Call
Please standby we're about to begin.
Good day and welcome to the P. J G partners full year and fourth quarter 2020 earnings call.
Today's conference is being recorded.
At this time I'd like to turn the conference all parts of Sharon Pearson head of Investor Relations. Please go ahead.
Thanks, very much Casey good morning, and welcome to the P. J T partners. So yeah, I'm sort of course of 'twenty 'twenty earnings Conference call.
I'm, sorry on pants, and head of Investor Relations of P. J T partners.
Joining me today is Paul Taubman, our chairman and Chief Executive Officer, and Hell of makes our Chief Financial Officer.
Before I turn the call average call them I want to point out that during the course of this conference call. We may make the number of forward looking statements.
These forward looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes could differ materially from that it indicates the misstatements we.
We believe that these factors are described in the risk factors section.
On the PK of cheap partners went from nine from form 10-K, which is available on our website at the key partners dotcom.
Once the reminds me that the company assumes no duty to update any forward looking statements and that the price of take somebody like today contains non-GAAP financial measures, which we believe are meaningful in the valuation of the company's performance.
The detailed disclosures on the non-GAAP metrics and the GAAP reconciliations.
If you could refresh of the financial data contained within the press release issued this morning also available on the website and with that I'll turn the call out of its Paul.
Thank you Sharon good morning, everyone and thank you for joining us today.
Once again, we are reporting our financial results.
Against the backdrop of the pandemic, which has caused so much suffering and loss.
In discussing our record results. We are mindful that this pandemic continues to roil communities and economies around the world.
But in these extraordinary times.
Our team did in fact deliver extraordinary results.
Before we review our 2020 performance.
I wanted to reflect on all we have accomplished in just five years.
Yeah.
From the beginning of our intent was to build a premier strategic advisory business from scratch.
Fortified by leading restructuring and park Hill businesses.
We had unwavering conviction that these businesses would be even more successful as part of the integrated yet independent firms.
And we believe that by building closer alignment.
And by removing legacy conflicts.
Each business would become larger and more powerful.
And in turn deliver exceptional results.
We have consistently focused on creating a culture.
We're all of our businesses work hand in glove together.
To better serve clients.
Our unique culture of close collaboration and teamwork.
Coupled with our differentiated capabilities.
Have enabled us to gain traction with clients faster.
Scale, our business faster and reach $1 billion in revenues faster than even our most optimistic forecast.
From five years ago.
Now turning to our full year 2020 results.
Firm wide revenues grew 47 per cent to 1.052 billion.
The adjusted pretax income more than doubled to 271 billion.
And adjusted earnings per share also more than doubled to $4.93 per share.
Now drilling down in our results in greater detail.
Beginning with restructuring.
Our restructuring business continued to be a market leader and in 2020 delivered its highest revenue ever.
The pace of activity increase dramatically as a result of far reaching business disruptions.
Caused by the global pandemic.
Our restructuring practice was bolstered by strong strategic advisory relationships with corporates as well as financial sponsors.
This ever closer collaboration enhanced our restructuring when rates.
And enabled us to seamlessly redirect resources when needed.
Our fourth quarter restructuring revenues were our second highest ever.
Surpassed only by our record third quarter performance.
Everywhere, we turn we see companies an entire industries.
Severely impacted by the pandemic.
The inevitable tapering of the government support programs overtime.
We'll further stress already weekend companies.
For many it will simply be a matter of when not if their balance sheets need to be restructured.
While we expect these elements to drive elevated restructuring activity for an extended period of time.
We do not anticipate 2021 restructuring activity.
To match 2020 levels.
Turning to P. J T Park Hill.
We saw a gradual return to a more normal fundraising environment as.
As market volatility subsided.
And then passengers became increasingly comfortable making capital commitments in a virtual world.
In this pandemic environment.
Our roster of best in class managers, coupled with P. J T Park Hills superior distribution capabilities.
The resulted in revenues rebounding in the second half of the year.
This snapback was led by strength in the private equity and hedge fund verticals.
As a result, 2020 revenues were only modestly below 2019 levels.
We expect P. J T Park Hill to carry over into 2021.
The positive momentum experienced in the second half of 2020.
Turning to the strategic advisory.
In strategic advisory we saw significant growth in 2020 revenues.
Compared to the prior year.
As we benefited from the completion of the strong pipeline of transactions.
Announced prior to the M&A markets shutting down in March.
Our franchise benefited from the expanding footprint.
As well as greater breadth and depth of capabilities.
This in turn enabled us to provide our clients with superior advice and execution.
Across a broader range of products industry.
Industries and geographies.
In the most volatile and complex markets, we have seen since the global financial crisis.
Our highly experienced capital markets team advised an increasing number of clients on liability management.
Capital structure optimization, and public and private capital raises.
Our commitment to developing a leading capital markets advisory business.
Was rewarded this past year.
As revenues more than doubled.
Looking ahead, we expect this business to grow significantly in 2021 and beyond.
In 2020, we also benefited from the continued integration of P. J T Camber view.
Into strategic advisory and our firm more broadly.
We are increasingly capitalizing on our expanding capabilities and activism defense.
Strategic IR shareholder advisory and E S G.
Our steady investment in our strategic advisory franchise continued in 2020.
With the addition of seven new partners.
Post of the depths of the market dislocations caused by the pandemic.
We have experienced a significant increase in client dialogues and strategic mandates, which largely track the rebound in market sentiment.
Our pre announced pipeline as measured by the number of new mandates and the revenue potential of these mandates has steadily increased over this timeframe and now stands at its highest levels ever.
While we cannot control the pace and timing of which mandates convert into announced and.
And completed transactions.
The increasing number and quality of mandates has in our experience.
<unk> been an important leading indicator of future strategic advisory performance.
Now over to Helen to review, our financial results in greater detail.
Thank you Paul good morning.
Beginning with revenues.
The type of revenue to 20 21.052 billion of.
The 47% here I think yeah.
The breakdown of revenues advisory revenues were 872 million.
63% year over year, driven by significant increases in both restructuring and strategic advisory.
Placement or anything you could draw of 162 million up 22, the same here every year.
And by an increase in corporate private placement activity.
As well as increased from placement activity from private equity interest from clients for the fourth quarter type of revenues of 322 million up 29%, you know where the yeah. The breakdown of revenues in the course of advisory revenues of 261 million at 59% year over year driven by Cigna.
Second here I think he had growth on restructuring and continued growth in strategic advisory placement revenues of 56 million roughly flat here the year.
Turning to expenses consistent with prior quarters, we presented the expenses consist of non-GAAP adjustments. These adjustments are more fully described in our 8-K first adjusted compensation expense.
Full year adjusted compensation expense of 669 million, 63.5% of revenues and a lot of the 65% ratio we accrued to the.
First nine months of the year for the fourth of course of the adjusted compensation ratio was 63%.
The strength that I read the news in the fourth quarter and difficult year enabled us to reduce our compensation expense as it does seem like you've read the news.
We will communicate our accruals for compensation expenses, the 'twenty 'twenty one when we report our first quarter results.
Turning to adjusted non compensation expense total adjusted non compensation expense for 2020 with hundreds of $13 million down 10% year of the year.
For the fourth quarter adjusted non compensation expenses of 28 million down, 16%, you know where the yeah.
The year over year declines in both periods reflect the significant reduction in travel and related expense as a consequence of the global pandemic, excluding traveling related and non compensation expenses decreased 6% year of the year.
As a percentage of revenue as our non compensation expenses pinpoint state of empathy for the full year, 'twenty 'twenty and $8 six per cent for the fourth of course huh.
In 'twenty 'twenty, one outside of the traveling and related expenses, we expect to have increased non comp expenses. We continue to grow head count and then based on our technology capabilities.
Given the disruptive impact of the pandemic on travel it's too early to forecast when and by how much travel will resume in 2021.
Turning to adjusted pretax income we reported adjusted pretax income of 271 million for the full year 2020 at.
The 105% year over year, and 100 million for the fourth quarter of 81% you know where the yeah.
Our adjusted pretax margin was 25, 7% for the full year free.
On 18 point, focusing from 2019 and 51, 2% in the fourth quarter up from 22, 3% from the fourth quarter 2019.
The provision for taxes as of prior quarters, we've presented our results as if all partnership units had been converted to shares and the all of our income was taxed at a corporate tax rate.
Our effective tax rate for the full year of 24, 8%, which is slightly lower than the previous estimate and primarily reflects the that wasn't anticipated state and local taxes.
In 'twenty 'twenty, one absent any legislative changes and excluding the tax benefit of share deliveries, we would expect our effective tax rate to be around 25% the.
Benefit of share of deliveries in 'twenty 'twenty impacted the tax rate by 8%.
The earnings per share our adjusted if converted earnings per share was $4 93 for the full year.
Compared with $2 41 of 2019.
And the dollar and if you want on the fourth quarter compared with the dollar to the prior year.
She accounts for the year ending 2020 on a weighted average share count of $41 4 million of 1%. This the full year 2019.
For the fourth quarter at a weighted average share count increased by one 7 million shares to $42 5 million up 4% versus the fourth quarter of 2019, the share count reflects the partial period of inclusion of $2 5 million performance based units that net share price thresholds during the quarter.
This increase was partially offset by the aggregate repurchase of one 2 million shares and share equivalents in the quarter.
For the full year 2020, we repurchase the equivalent of approximately $2 9 million shares at an average price of $56 94 per share through open market share repurchases exchanges of partnership units of cash and meet chiefs governments.
The currently in receipt of exchange notices for approximately 680000 partnership units as we have done on the past we will exchange these units for cash.
Consistent with our capital priorities, we will continue to focus on investing in the business.
Oh, so you use the excess cash to reduce the dilutive impact of these investments while also being mindful of our flows.
The board has authorized an additional 150 million repurchase program for shares of the company's class a common stock. This is in addition to the $36 million remaining from the prior share repurchase authorization.
On the balance sheet, we ended the quarter with the highest cash balance is either with the 437 million in cash cash equivalents and short term investments and $329 million and net working capital and we had and I founded the outstanding.
And finally, the board has approved the dividend of five cents per share the dividend will be paid on March 17, 2021 to class a common shareholders of record as of March the 'twenty 'twenty, one and with that I'll turn it back to Paul.
Thank you Helen.
In terms of our outlook.
By any absolute or relative measure our first five years as a public company.
Has been a resounding success.
Over that period of revenues have grown at a compound annual rate of more than 20 per cent.
That our pretax income is now more than six times 2015 levels.
And just the last two years of revenues have increased by more than 80 per cent.
And our pretax income has nearly tripled.
Undoubtedly 2021 year over year comparisons.
We will be more challenging because of the standout performance.
Notwithstanding the tremendous success, we have enjoyed in the first five years of our firm.
We are still very much in the early days of building out a market leading franchise.
Even though we have more than doubled their head count in the last five years, we still have a relatively undersized footprint.
Looking ahead, we see significant opportunities to expand the global reach of our franchise and more fully capitalize on our best in class advisory capabilities.
As our reach expands so too will awareness of our distinctive capabilities.
And the power of our brand.
As before we remain extremely confident in our future growth prospects.
With that.
We will now take your questions.
Thank you.
You would like to ask a question you may signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure you're on mute function is turned off to allow your signal to reach our equipment once again star one for questions.
We'll take our first question from Devin Ryan with JMP Securities.
Great Good morning, everyone.
Good morning, Kevin Good morning.
Thanks. So first question here just wanted to touch on productivity.
After after you know terrific on 2020.
One way, we look at it the revenues per employee.
$4 million on.
At the end of the year employee head count 1.6 million on the beginning of the year on the head count that I. Appreciate you know this isn't the output out of the input to the model but.
How do you think about.
The the push and pull between the productivity that you had this year and the fact that you know all business, whose business is performing pretty well versus you know the fact that there still.
The number of people that are call. It newer on the platform and are scaling on the contribution of productivity just trying to think about this is obviously it was a terrific year as the point. So if you kind of think about weather.
These are levels that could be achieved again, we're on it.
This is of really high bar, just given the that all of the businesses performing well.
Well every.
I mean, it's a simple question with the complex answer Inc.
If you break that down.
There are of different there of different elements to it if we locked the doors.
And we could repeat all of the market conditions of 'twenty 'twenty.
With the same team having been on the platform for one year or more.
I would expect us to deliver more revenues and therefore, the productivity would be even higher.
Because every year that goes by we are a stronger more formidable firm and every year that goes by the.
The senior people, who are on our platform they have of more more traction with clients. So all else equal that vector moves up into the right.
Second issue is as we add more individuals that then pushes that down because as we add additional.
Professionals to the platform, we then end up with and the.
Early days, you know no real productivity.
And then the third is is that every year of you know the market conditions are not the same so.
If you just where the isolate that one dimension.
I believe that the all of the individuals who are on this platform get.
The stronger at are able to do more business off of this platform as time goes on.
Okay I appreciate that Paul I understand there's a lot of moving parts in there but the.
That's the perspective at maybe one of the oldest of on the compensation ratio in the trajectory.
Good to seize them, you'll kind of continued comp leverage as the business has grown and revenues are scaling.
The last four years, you've been within 100 basis points of comp growth relative to revenue growth. So there's been a pretty tight relationship there.
Is that a good way to continue to think about it or is that just kind of where the output is ended just based on you know kind of a bottoms up on you know it seems.
Like there is.
Really strong connection just sort of trying to think about it from a modeling perspective, if that's a pretty reasonable way to think about it over the next couple of years assuming.
On a reasonable revenue backdrop.
The I mean that that that May in fact, you know the b how it the reveals itself top down, but but we do look of the compensation from the bottom up we're always focused on making sure that we are not in any way short changing our commitment to investment.
We also are mindful that over time, we expect to deliver you know increased margin.
To our stakeholders, although we do consistently make the point.
That margin improvement comes from both a disciplined on non comps disciplined on comps as well as growth in revenue. So it's never always a straight line and in any direction. You know margins don't always go up into the right revenue don't always go up into the right cost on <unk>.
Please come down you know into the to the sort of the to the bottom so it.
It's difficult to be overly prescriptive, but we'd make a couple of points which is.
We believe that overtime.
Our overall profitability the normalized conditions should.
Meet or exceed that of our representative peer group, but that in periods of heavy investment.
And of high growth.
And where.
Traction is being made with clients on our platform is being enhanced but the full power of the revenues haven't yet reflected.
You'll see elevated expenses on the margin side and had a little bit of pressure. So overtime. This all tends to normalize and that's something we've been saying for <unk>.
For five years, but it doesn't happen perfectly neatly quarter to quarter.
Or even year to year, and what you see here as much as anything else.
Was we sat down with what we thought was the appropriate comp accrual at the beginning of the year.
And as we saw more and more information.
We became increasingly comfortable that the full year ratio should come down and that was take it all out in the fourth quarter. So.
The fourth quarter number is far less meaningful than what the full year ultimately ended up being because we do think about our comp accruals from the <unk>.
Context of full year performance.
Okay got it.
That's helpful color of maybe one more if I can squeeze in here Paul just wanted to get your thoughts on the stock market. Some of your peers have.
On to their own backing them out somewhat.
Coordinate business strategy around the opportunities, though obviously with the surge of activity.
Over the past year in that market I'm curious, how you guys are thinking about it.
The types of opportunities Youre on.
Looking at around the stock market more broadly.
I mean, we we rethink that this.
Is is here for maybe not.
Here to stay forever, but it's certainly here for a while and.
And it is capitalizing on some arbitrage and the ability to create a public vehicle. This way then through a more traditional IPO that were clearly seeing you know of.
The market that is flushed with capital we've been active in the spec market in a variety of ways. We have served and will continue to serve as a book runner on spec offerings. We have represented companies and sold them into specs have been part of the Destocking process.
We have and will continue to raise significant amounts of capital to provide the so called type financing into Spacs and we're in conversations with our client base as to whether or not there's merit to them either raising their own spec or.
During a spec as a way of creating a public listed entity or potentially selling the business or monetizing part of the business through any spec. So we're we're very mindful of the of the trend.
I have some questions as to whether this this pace of activity can continue but I do think that the stack.
The spec model is scratching at itch that desperately needs to be scratched wishes to bring particularly high growth.
<unk>, who are of voracious leaders of capital to to create a public vehicle.
On a different way of being able to provide.
Capital directly from sophisticated investors, who are investing really as of late stage growth investor.
Being able to marry that with the public listing is powerful.
Yes.
Yeah, Okay terrific I will leave it there I appreciate the answers.
Thank you Devin.
Thank you we'll take our next question from Richard Ramsden with Goldman Sachs.
Hey, guys.
Good morning, So can I ask a couple of questions first let's start with the restructuring business on with your outlook for that business. So.
So I I heard your comments around your expectations that that will be weaker in 2021 could you just explained the little bit on.
The the drivers to that is that because you're seeing the week of backlogs heading into next year or is that just a reflection of the strength of that business and in the second half of 2020.
Well I think to be fair of less strong as is a more accurate description because we're talking about.
Stepping back a bit from record levels. So so from our perspective, it's going to be of very strong year I think by context, we expect the our restructuring our performance this year to be meaningfully enhanced relative to what we saw in 2019.
But not likely to to meet or exceed 2012, the levels and part of that was there was restructuring activity.
That was.
It was initiated in the depths of the economic crisis in March and April and May.
And I think by all of a reasonable.
Observation of market conditions, or you know more healthy today than they were of them. So I think it's nothing more than that having said that.
And we have been consistent on this Richard.
The economic damage that has been done to a whole swath of companies and industries and economies is extraordinary.
On the quantum of additional debt that has been taken on by many of these companies is of sustainable now with exceedingly low interest rates.
And with a buoyant equity markets are these.
These companies have been able to sort of continue to lift the wrong, but they do have damaged economic models many of them.
We believe that inevitably many of those companies will need to be restructured. So we we see a very strong there.
Opportunity in restructuring for many years, but the fever pitch.
Of the spring and summer of 2020.
They will be repeated but it's not likely to be repeated in the coming months.
Okay that makes sense.
The men on the placement business I think of them right in saying that this was a record quarter for you is there any seasonality that we should think about in the fourth quarter. When we think about the run rate for that business. The 'twenty 'twenty one.
Well the.
The the park Hill business tends to have seasonality, where a lot of fundraisings, there's an impetus to get fundraisings closed by year end did not have the carry into the next calendar year.
But increasingly our placement of revenues are reflective of not just of Park Hill performance.
But also the substantial.
Corporate private placement business that we have built out that as part of capital markets Advisory and as we are increasingly involved in pipe transactions for specs.
We're increasingly involved in you know a.
Later stage of capital raises for private companies and the like you're going to see more of that pop into the placement lines. So I think that is partially seasonality, but also reflective of the fact that as our business grows.
As we are increasingly undertaking capital raise of assignments for a variety of companies that line is going to be contributed to by a multiple of parts of our firm.
Okay, Great and then just one last one for me Paul which is can you talk a little bit about your longer term aspirations around the capital returns. So obviously I see the the inquiry from the authorization from the buyback.
Is the increasing the dividend is something that you would consider the theater just given the scale of the breadth of the business and you know what are the milestones that we should look for in terms of increasing the dividend relative to the buyback.
I think our bias has been to favor the share repurchase of share equivalent repurchase over dividend.
And when when we got to you know.
On economic crisis earlier this year at the company's everywhere, we're suspending dividends or cash.
Questioning whether they could continue dividends of the like all of our belief is the soundest way to return capital is to be able to do it on an entirely discretionary basis and the way to do that is to keep the dividend low. So that has a bias that doesn't mean, there isn't room for it to grow it just means that our bias is.
For that reason and the fact that we continue to believe that there is extraordinary value.
In our shares trading at these levels that we are likely to lean far more heavily on two of buybacks than dividends.
I also would point out that as our share price has ticked higher and as.
Market conditions have been met we have been also very focused on offsetting the dilutive effect of those additional shares.
So that's been the bias we constantly look at the the dividend, but I do think that for the foreseeable future. Our bias is going to be to try and lean in more to return through a.
The repurchase of shares and units than dividend, but there may well come a point in time, where that shifts because you know there's one other thing that we're also mindful of which is the float in the stock and it continues to grow and we have been very focused Helen and I to make sure that the.
Share repurchases are less than additional shares coming into the market. So the overtime, we have more liquidity not less.
And as long as we can continue to avail ourselves of repurchases of units.
Which really are too for the they returned capital they offset dilution.
And they don't affect the float as long as that's available to us that's likely to be the preferred course, but but we're not we're not dogmatic about any of this.
We're always going to be focused on what's the best package of.
Of actions to create shareholder value and to reward our long term share owners.
Okay. Thank you that's that's very helpful.
Thank you Richard.
Thank you we'll go next to Jim Mitchell of Seaport Global Securities.
Hey, Good morning, Paul Helen maybe just a question on head count growth I mean, that's obviously been significant and the strategic advisory area I think doubled the last three years, how do you think about the recruiting environment now revenues the environment has dramatically changed.
Does that sort of make.
Recruits hesitate to come over because they have a big.
The pay day coming or how do you think how do we how do we expect or how are you seeing the accrued in the recruiting environment right now.
I think the recruiting environment.
The longer you go out of the more attractive it is a the number of conversations that that we have you know just continues to grow and the more successful our firm.
And the more evident it is two two outsiders, who may not be as close to the hour firm as some of the the others who have joined the as they get more familiar with our firm, we we get more mind share and it's easier to recruit and certainly we see that on campuses everywhere undergraduate.
And graduate we have.
Overwhelming demand too to join our firm the challenge as we've said before Jim is in a pandemic world.
Well, you're making senior hires and you don't have the ability to have that direct personal connection it does make it more difficult and we've said for a while that while we will continue to add head count.
Doing it in a virtual world.
It's more difficult if not impossible will continue to add exceedingly high quality recruits.
We'll attract.
The highest quality partners to our platform.
But I would expect that as long as we're in a virtual world for that to be to be slower, but the number of conversations.
And the interest.
In our firm, we've always seen that grow overtime.
Okay. Thanks, and maybe just another follow up on the on the buyback I think the last one of your announces in April of 19 for 100 million you didn't finish it and this one you bumped up 50% is that the signal that you have a little more capacity the floats better that you can do more or.
Just trying to think of the pace of that you know obviously of cash levels of very high does that mean, you can sort of increase the pace of buybacks in the open market or this is shouldn't read the read into that.
I'd make two points of that I'll turn it to Helen one is where we're also spending a lot on our cash.
Cash settlement of units that are presented to us which are not in these numbers. So these are over and above.
What are the board.
The board authorizes us to to respond to exchanges that are presented to us on a quarterly basis. So a perfect example of being this quarter, we're going to.
We repurchased nearly 700000 units for cash which is effectively a share repurchase.
We are mindful of the float and as long as there is a lot of supply available to us through exchanges that is going to be our preferred means.
But to the extent of those units that are presented to us.
The reduce overtime then we're gonna be looking more to the open market. So I think that's really how we're thinking about this and then the <unk>.
Hundred and 50 versus 100 is partially reflective of the fact that our shares are trading at higher levels today. So it's the.
You need more capital to retire of share today than we did two or three years ago.
And also where we're obviously a larger company with the with stronger cash balances. So we're very comfortable with.
With what is now I guess of 186 million of total authorization.
Right. Okay. So it's more about flexibility not necessarily and acceleration of timing on using that up.
The weighted I think I'm hearing it.
Okay.
Maybe another way to say it is where we're looking to continue to aggressively repurchase share equivalents and how much is going to be through open market repurchases of shares is in large part going to be a function of whats available to us through exchanges and it becomes more of the plug and it also is a function.
Sort of whether or not we see that there is an opportunity to the repurchase.
No shares that are at bargain prices, so it's a little bit of everything.
Okay. That's clear thank you very much.
Thank you that will conclude our question and answer session. At this time I'd like to turn the call back over to Mr. Thomas for any additional or closing remarks.
Just want to thank everyone for joining us. This morning, we know that these are challenging times and the on behalf of all of US. We wish you a good health and that you stay safe and that where I'm able to to connect our at our next quarter and continue this conversation.
So thank you all very much.
That concludes our call. We appreciate your participation.
Okay.
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