Q1 2021 Piper Sandler Companies Earnings Call
Only one.
During the question and answer session Securities industry professionals may ask questions of management.
The company has asked that I remind you that statements on this call that 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 and the company's earnings release and reports on file with the SEC, which are available on the company's website at Www Dot Piper Sandler Dot com and on the SEC website at Www Dot S E C Dot Gov.
This call will also include statements regarding certain non-GAAP financial measures the non.
Non-GAAP measures should be considered and 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.
The earnings release is available on the Investor Relations page of the companies website and at the SEC website.
As a reminder of this call is being recorded.
And now I'd like to turn the call over to Mr. Chad Abraham Mr. Abraham you may begin your call.
Good morning, everyone.
Thank you for joining the call to review, our first quarter 2021 results.
I am here with Deb, Schoneman, our president and Tim Carter our CFO.
We will go through our prepared remarks, and then open up the call for questions.
Market conditions remain supportive during the quarter and the strength and diversity of our franchise continues to be evident as we delivered record first quarter results and we continue to execute on our strategic priorities.
As the operating environment continues to open and we are accelerating the process of bringing employees back to the office and we are increasingly meeting with clients face to face.
During the first quarter of 2021, we generated record adjusted net revenues of $414 million of <unk>.
For 8% operating margin and adjusted EPS of $4 13.
Our strong start to the year was broad based as all of our businesses had impressive results during the quarter.
Turning to our corporate investment banking business.
We generated total corporate investment banking revenues of $269 million and the first quarter of 2021.
This is the second consecutive quarter with corporate investment banking revenues in excess of $250 million.
Our performance by sector was broad and led by our market, leading health care practice, which continues to generate record results as we assist clients to connect them with investors who have an interest in this space.
The quarter also included strong contributions from our consumer team.
Which had a record quarter driven by strong M&A activity.
And from our Technology group, which was active in equity capital raising.
During the quarter equity financings contributed 43% of total corporate investment banking revenues and.
M&A activity generated 40%.
And that and capital advisory engagements produced 17% of revenues.
We expect our mix of corporate investment banking revenues to shift as our advisory pipeline built and equity capital markets activity begins to moderate.
Our advisory services business performed well generating revenues of $153 million during the first quarter of 2021.
We completed 47, M&A transactions and 30 capital advisory deals.
M&A activity and pipelines continue to build across all of our industry verticals.
As an example, we have advised on seven of the 10 largest valued bank M&A transactions announced this year.
The pace of COVID-19 vaccine access has picked up and businesses are quickly repositioning for the post pandemic landscape.
Demand for <unk> investors and specs, along with low rates ample liquidity and the strong economic recovery are driving CEO confidence and M&A activity.
With the investments, we have made and the strength and breadth of our advisory business. We believe we are well positioned to capitalize on the accelerating strength of the market.
Turning to corporate financing.
We continue to take advantage of a spectacular equity new issuance market, where activity was centered on health care companies and specs.
During the first quarter of 2021, we generated a record $116 million of revenues and completed 71 equity financings raising $22 billion and new capital for our clients.
Our expertise and reputation and the health care space combined with robust markets allowed us to assist our clients to raise record levels of capital to fund the innovative technologies, which drove our strong performance.
We ranked as the top three book runner of health care IPO and follow on offerings during the quarter.
Our success and momentum continue to resonate and the marketplace and our recruiting efforts have been very effective over the last six months, we have strengthened our presence by adding <unk> and healthcare technology financial services and diversified industrials as well as our growing restructuring capabilities.
We plan to continue strengthening our sector penetration by adding talent looking to embrace our client centric culture.
Before I turn the call over to Deb I'd like to highlight of recent leadership transition.
In March we named Mike del of Hunt as co head of investment banking and capital markets.
<unk> has transitioned to the role of vice chairman of investment banking.
For over a decade, Scott with my steadfast partner as co head of investment banking and has continued as a trusted advisor.
And as Vice Chairman of investment banking and Scott will remain involved in many of our most important growth initiatives, including seeking our corporate development opportunities and identifying and connecting with talented people who fit our culture.
Mike Doyle will co lead the group alongside James Baker, who has served as global co head of investment banking and capital markets since 2018.
Mike is the 23 year veteran of Piper Sandler and exceptional banker as well as a growth oriented team builder and culture carrier for the firm.
Mike recently served as co head of the diversified industrials and services group, where he led its sector expansion and growth of its private equity coverage.
I am confident that Mike and James will successfully lead our corporate investment banking business to accomplish its many near and long term goals, including growing annual revenues to a consistent 1 billion plus and the coming years.
Now I will turn the call over to Deb.
Thanks, Chad I'll begin with an update on our equity brokerage business.
Equity markets and the first quarter saw elevated volatility and volume.
Market indices traded higher driven by COVID-19, 19, vaccination access and improving economic metrics.
Client activity increased with market participants repositioning into securities that are expected to benefit from the reopening of the economy and a shift from growth saks to value stocks.
Federal stimulus measures and accommodative federal reserve policies, providing ample liquidity for additional catalysts to the market.
Our equity brokerage business generated revenues of $43 million for the quarter up 9% sequentially and down 10% from the first quarter of 2020, where we saw unprecedented volatility as the world's first phase of the pandemic.
We assisted clients trade 3 billion shares during the quarter as clients repositioned portfolios and side of our premier trade execution capabilities.
We continue to increase the number of clients transacting with us on a monthly basis.
As an increasing number of clients gravitate to our enhanced scale research products and execution capabilities.
Looking forward in April we have seen meaningfully lower volumes, resulting from the decline and volatility as market participants have entered the consolidation phase.
We remain focused and providing value added research product and premier execution capabilities to assist clients navigate and ever changing investing landscape.
Turning to municipal financing.
Our public finance business started the year strong with $27 million of financing revenues down from the strong fourth quarter of 2020 and up 20% compared to the first quarter of last year.
We continued to benefit from strong new issuance as clients took advantage of low rates and.
The first quarter saw a decline and governmental issuance from the robust fourth quarter, especially in the school district space.
However, we saw a marked increase in demand for specialty sector, issuances, which provide investors with higher yields and cannot for us higher fees.
We continue to grow our specialty sector offerings, which is a differentiator in the marketplace.
We were able to capitalize on our strength and charter schools senior living and project finance specialization to assist clients and these specialty sectors raised capital in the first quarter of 2021.
And we underwrote 181 municipal negotiated issuances, representing approximately 10% of the activity and this market and we retained our number two ranking based on number of deals nationwide.
Looking ahead, we expect market issuance to remains strong.
We expect governmental issuance to continue to moderate however, we see increased demand for higher yielding specialties sector offerings, where our pipeline is strong including with our recently added Colorado based team specializing and special district financings.
Turning to fixed income.
For the first quarter of 2021, we generated record fixed income revenues of $66 million of 25% from the fourth quarter of 2020.
The market saw increased interest rates and the first quarter, which drove client activity.
The 10 year Treasury rate increased from <unk>, 93% at December 31 to one seven and 4% at March 31.
The increase in risk free treasury yields reflect uncertainty and the market and expectations of future inflation.
Volatility and yields has been driven by uncertainty and the market with respect to the impacts from government stimulus increase and government debt levels, very accommodative fed policies and the strength of economic activity from the reopening of the economy.
We have seen some clients repositioning balance sheets and portfolios for higher rates, while other clients see the increase in rates is transitory.
The uncertainty and the direction of future interest rates has driven client volumes higher which has benefited our client flow based business.
From an outlet perspective, we anticipate the uncertainty over the direction of interest rates to remain front and center as our clients react to and evolving economic outlook.
We aim to retain the tremendous momentum and our fixed income business by providing differentiated advice and analytics tailored to define client vertical.
Serving those clients with product expertise that goes far beyond traditional bank to include derivatives loan strategies and securitization.
We also provide clients with access to the breadth of our new issue taxable and tax exempt products.
Now I will turn the call over to Tim to review, our financial results and provide an update on capital use.
Thanks Deb.
As a reminder, my comments will be focused on our adjusted non-GAAP financial results.
We generated revenues of $414 million for the first quarter of 2021, and the increase of 4% sequentially driven by strong contributions from each of our business lines, including record corporate financing revenues.
Revenues for the current quarter increased 69% from the first quarter of 2020, as we benefited from the significant recovery of investment banking as well as robust trading activity.
Turning to operating expenses and margin.
Our compensation ratio was 61, 5% for the first quarter of 2021 compared to 61, 9% for the full year of 2020, reflecting our strong performance to start the year.
We continue to manage compensation levels, while considering the investments employee retention and business outlook and we continue to expect our compensation ratio to be near 62% based on our current market outlook and strong pipeline of growth opportunities.
Non compensation expenses, excluding reimburse deal expenses were 44 million for the first quarter of 2021.
This level is consistent with the fourth quarter of 2020 and reflects the continued pause on travel related expenses.
We estimate our non comp expenses, excluding reimbursable expenses will gradually increase as travel related costs returned to more normalized levels.
For the first quarter of 2021, we generated operating income of 103 million and and operating margin of 24, 8%.
Our operating income and margin reflect the increased scale, we have built the successful integration of our acquisitions and the benefit of lower travel related expenses.
The strong results represents the second consecutive quarter with over $100 million of operating income and the third consecutive quarter with an operating margin and excess of 20%.
We continue to demonstrate our ability to drive operating margin expansion, while growing revenues and generate significant levels of excess cash from operations.
Our adjusted tax rate was 24, 9% for the first quarter of 2021, which included a $1 3 million tax benefit related to restricted stock vesting at prices higher than the grant date price.
Excluding this benefit our adjusted tax rate was 26, 2% for the quarter.
We continue to expect our full year adjusted tax rate will be within our targeted range of 26% to 28% going forward.
Turning to earnings.
For the first quarter of 2021, we generated net income of $75 million up sequentially, driven by higher revenues and a lower tax rate.
Diluted EPS for the first quarter was $4 13, representing.
Representing our second highest quarter on record and second consecutive quarter with EPS over $4 per share.
Let me finish with an update on capital.
Our capital and liquidity positions are strong and our leverage remains low and we believe that our priorities for capital deployment remains aligned with our shareholders' interest.
Over the last 12 months, we've invested and our advisory business by completing the acquisition of the valence group to expand our industry coverage, while strengthening our European presence.
The diversified and broadened our investment banking product capabilities by completing the acquisition of Trs advisors, our restructuring advisory firm.
Paid an aggregate of $47 million to our shareholders through our quarterly and annual special dividends.
And repurchased approximately 249000 shares for $24 million.
Of common stock on an opportunistic basis in order to offset dilution from annual stock grants.
In addition, the board approved an increase to our quarterly dividend to <unk> 45 per share to be paid on June 11, 2021 to shareholders of record as of the close of business on May 28.
Given our earnings power and cash generation capacity, we anticipate continuing to remix our annual special dividend in favor of our quarterly dividends.
Overall, we are pleased with our start to 2021 and record first quarter results. Our business continues to be exceptionally well positioned for growth and we are confident and our ability to deliver on our long term strategic objectives.
And we can now open up the call for questions.
At this time of you'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one to ask the question.
Your first question is from Devin Ryan of JMP Securities.
Great Good morning, everyone.
Morning, Devin and Allen.
Alright apologies if this is redundant and hopped on a minute late but wanted to.
Yes, I guess start on the investment banking outlook and.
I appreciate.
And we're in a very strong backdrop right now, but if I look at kind of the revenues per managing director.
Last couple of quarters, you've been generating over $8 million.
Which is obviously up pretty substantially from call it $5 million to $6 million and kind of the recent past here. So I. Appreciate there is kind of a lot and this but I'm just kind of curious how you guys think about or have an expectation for water of range of productivity should look like and just with the both the backdrop and maybe.
The mix shifting slightly like how you guys are thinking about the baseline of <unk>.
Activity is the baseline moving higher even considering.
Considering the backdrop of strong it's really the question.
Yes. Thanks.
I'll take that Devin and I don't.
Think we've really changed sort of are.
Our outlook.
$6 million.
And as a good number I do think obviously and these robust capital markets or when we have quarters, where we have significant revenue levels.
And we've had times, where we've operated above that run rate, but we're certainly not predicting that we're going to consistently operate at $8 million ahead, all of that being said I would say just as we continue to build the platform as we continue to do larger deals and add more products.
Restructuring all of the work we're doing with specs.
Clearly that offers the bankers sort of more efficiency more product groups to work with and so over time that productivity level should continue continue to go up.
Okay, Great and I appreciate that and then maybe one on the fixed income trading.
Clearly, it's been a very good backdrop and I know a lot of thanks for your repositioning balance sheets and.
Kind of with the.
The move and securities yields Theres kind of opportunities there as well.
And I'm trying to parse through kind of what is.
And feeling like a very strong intermediate term outlook.
But then beyond that.
The normalized level of activity and that business I guess are we kind of over punting because we're in this.
And you kind of unusual environment, right now or Youre kind of similar to the investment banking as the baseline.
They are moving quite a bit higher, especially maybe as youre getting some synergies with the sandler business as well.
Yes, the Devin and I would say actually it's probably some of both of that clearly.
The uncertainty and interest rates and driving positioning as you spoke to particularly with the depository.
Excess liquidity and the marketplace. So all of that is providing and these nice tailwind for the business, but that being said.
The breadth of our product capabilities now goes so much more beyond pier bonds, and we're seeing the benefit of things like derivatives.
Loan trading securitizations and combining that with our strategic analytic capabilities as you mentioned, bringing these two firms together with the Sandler and legacy Piper has definitely given us and ability to have a broader platform. So some combination of the both of those I would say.
Okay, Great color and then just last one on capital return and the opportunities you are clearly.
Creating a lot of capital right now and this environment, which is great.
And to get some thoughts on that.
And what you guys are seeing in the environment potentially around M&A opportunities. If there's anything that feels interesting at the moment or youre seeing.
A lot of flow around.
And then just also kind of appetite for for stock repurchase clearly liquidities, a bit better and the stock but.
Non incredibly liquid.
And maybe there's opportunities to put more capital and the buybacks as well if there's lots of thoughts on both of those thank you.
Yes.
Kevin I'll just go first I mean, I think it is.
We've been consistent on the last several calls I mean with the.
The operating income and cash flow, we're generating and and we need we need sort of multiple avenues, so investing and our own internal growth then.
M&A.
On M&A, we are and we continue to see.
Interesting idea is obviously as we've grown the platform the areas of overlap or.
Smaller in terms of just perfectly green space, but we consistent we consistently continue to see good opportunities and I think of lot of that just has to do with more and more of sort of talented boutiques and producers.
See that with Simmons and Sandler we've been able to bring in producers make make it a great opportunity for them to have access to more products and so yes. We're optimistic we will continue to see those and we'll continue to.
Find some transactions to do and I'll turn it over to Tim on just the rest yes Devin.
And we.
And there is this balance we feel like given the cash generation, we need to use.
All three of the levers corporate development, the Chad just talked about certainly the dividend, which we increased the quarterly here and we'll continue to look at that we've got our target of.
Deploying back 30% to 50% of adjusted income through that dividend. So we'll stay focused on that and then the specific too.
Buybacks and we want to stay active there and our goal has always been to.
The offset the dilution from the annual grants, we got about half of that Doug and the.
The first quarter and.
I think we are.
Focused on the liquidity of the stock. So there is some some balance with with the buyback aspect, but it really is us and all three of those levers given the cash generation.
Yes.
Okay terrific.
Terrific and I appreciate you, taking the questions and great to see the momentum.
And thank you.
Your next question is for Mike Grondahl of Northland Securities.
Congratulations it's almost like a fourth quarter for you guys, but the Abbott and the first quarter is pretty cool.
First question, maybe for Chad Chad would you see the M&A advisory business is 100% back.
And then related to that.
What per.
<unk> of revenues do you kind.
Think of the advisory has being going forward.
Yes, Paul.
And clearly I mean, as we said after Q4 of the.
The backlogs and M&A advisory business hit its really really strong and I would say for almost all of our industry teams are backlogs and advisory are at <unk>.
Record level. So we continue to see strong momentum and backlogs build really.
I mean, you can name of the sector, but they're all they're all quite strong and then just as a reminder, our our advisory revenues. The vast majority of M&A, but we also have some capital advisory some of the some of the debt advisory placements that we're not doing is underwritings.
Come and that in that line as well, but I think our our stated goal was to always have advisory be at least half of the business.
Don't think that.
The state of goal.
Nearly when we have quarters like this where corporate financing.
To have a financing quarter north of $100 million, obviously, thats going to make it tougher on the mix but.
We're really excited about the backlogs and M&A and the activity going on and just the across the industry teams. So.
We expect that mix to stay pretty healthy.
Got it.
You're calling out healthcare, but it sounds like just about every vertical and it's pretty robust is there any specific vertical the call out after healthcare or is it just all of them, yes, So I would say in Q1.
Our three strongest verticals healthcare and financial services were.
Very good advisory partners, but our consumer business as an example.
Said had a record.
Advisory quarter, and and those were the three strongest.
And Q1, but we've got lots of momentum and our diversified industrials business Valens has a really good backlog of transaction. So we will see that mix shift as we.
As we move forward and then obviously, we haven't seen all of the revenue from financial services and M&A roll through a lot of those announced deals take a while at the close but we did mentioned and the release we've been on seven of the 10 <unk>.
Largest debt bank depository M&A deals announced this year, so lots of momentum and the financials as well.
Great Great and.
And maybe for Deb.
Deb with the administration of the New administration.
At around 100 days, and some tax policies and whatnot any opportunities or incremental opportunities for the fixed income group.
You see on the horizon.
Mike I would say right now that it's just uncertain. There are so many unknowns and just take infrastructure spending which a lot of people are talking about we just don't know how much of that is kind of require additional borrowing outside of the federal level or will there be funding that really replaces the need to borrow so I would say at this <unk>.
A lot of uncertainty and just exactly how that will impact our business.
Got it Okay, hey, thanks, guys. Thanks.
Thanks, Mike.
As a reminder, if you would like to ask a question. Please press star one that is star one to ask a question.
Your next question is from Michael Brown of K B W.
Okay, Great, Hi, Chad and Jen.
Hi, Mike and Mike.
And.
Just wanted to start with the stock market.
Wanted to hear a little bit more about how you think the.
And the trends there and kind of both the IPO and advisory side of the business could play out for.
For the for the year here and.
And I guess kind of two follow ons, there would just be.
Is there as you are.
I need to continue to invest in your capabilities and the Spanish is out of an area that youre focusing on for for growth and.
What was kind of the contribution related to specs and investment banking this quarter just roughly.
Yes, so I would say Mike.
And where we are participating in the bank market for us the revenues in.
Q1 was under $10 million.
Obviously seen results from others, our strategy has been to to be fairly selective with the certain facts around areas of expertise, we have where we really can add value. So that we're really driving long term.
The value of startup for both sets of clients I would say, we took a strategy where not where we're not going to just.
Hop into the entire IPO of back market.
Unless we've got sort of that expertise of cross sector all of that being said I would say our backlog and this back markets building, especially on the advisory side and the pipe side.
Youll see that revenue line continue to grow but again, we're not going to take a holistic participate and everything approach, it's going to be where we know the teams, where we know the sector and where we're really confident that a year or two years down the road we've delivered for investors.
Okay, great that makes sense.
And on the on the brokerage business and just wanted to hear a little bit more about how you think about the.
And the growth potential for that business longer term obviously.
Very much market activity dependent.
But other certain capabilities.
Regions that youre looking to potentially invest to grow more or is it really of that incremental dollars.
Investigator of a really much more focused on on the other businesses at this point.
Yes.
Yeah, I'll take that and it really goes across fixed income and equities and fixed income went to I spoke to earlier is a lot right now about that.
Realizing the synergies of the combination with Sandler and.
Incrementally expanding on some products, but I think that is left around significant investment and more around leveraging what we have and and being additive with them organic investments.
But the growth opportunity there as a result of all of that on the equity brokerage side. Obviously, we have now a much stronger business. After the acquisition of Weeden and the middle of 2019 and.
Continuing to see growth and the average number of clients that we're trading with every day. So again don't feel like we fully realize the capabilities there yet and.
It's an area, where we will look opportunistically are there areas that makes sense to add from either a trading product perspective.
Or even potentially a research perspective, but in terms of the large dollars of.
The growth opportunity I think Chad spoke to that earlier and we're looking at some of those acquisition realm.
Relative to our different the banking vertical.
Okay, Great just maybe one ticky-tacky question here.
Just looking at the investment income.
Which was up this quarter.
And the press release it points to some gains and the merchant banking funds, which of course worked against the last quarter.
Can you just give us a little bit of color of what is what makes up some of those merchant banking investments.
Just to have a better understanding of what that line.
What makes up that line yes.
Yeah, Mike I'll take that so.
And Theres, two merchant banking funds, which which were invested in.
And a lot of those aligned and sort of the investments aligned with various sectors that that we cover from a banking perspective.
So we make investments as a part of those funds and those different companies.
So you can think of that and the health care space and the consumer space text.
Tech space.
And Youre right I mean.
Last year, obviously, we look at those and need to Mark codes. Those investments we have some unrealized losses that went through.
Last year, we saw some of that come back and the second half.
And it does get to sort of just the underlying valuation of those companies. We've actually seen a couple of liquidity events from the funds early into the into this year.
Related to either.
The acquisition the one of those might go through or even in some cases.
And they May go public and so.
It's really that the.
The underlying valuation of those investments within the fund and I guess, Mike the only thing I would add to that is.
I realize some of our competitors have sort of some concentrated big positions for us, we're an investor and the fund and its a pretty broad portfolio. So it's not like there's one or two investments that make them sort of massive part of that.
Okay, Yeah that makes sense and that's that's helpful color and it's at the small lines.
Just looking for a little bit more information there.
And that's it thanks for taking my questions.
Thank you.
Your next question is a follow up from Devin Ryan of JMP Securities.
Okay. Thanks, just wanted to follow back up on kind of potential changes to tax code and capital gains rates and appreciate.
This is going to have to get worked out and negotiated but.
Is this.
And this is starting to come into the conversations yet for the advisory clients, you're obviously selling a business and capital gains.
As an important consideration so I'm kind of curious whether it's driving conversation. So it's helpful. For if it's something that it's just too early to really start to talk about and any real way and then.
And about it for a family owned business.
And this obviously is a maybe a bigger issue to the extent, we progressed with a substantially higher capital gains rate.
The sensors and your sponsors are going to figure it out and they're going to move forward, regardless of what happens. So good luck, maybe a little bit of perspective of what you guys are focused on and and kind of thoughts around the applications for the business appreciating that it's still very early.
Yes, I guess, Kevin what I would say about that is as I've certainly been part of some client situations, where I know its driving part of the thinking I know its on some clients' minds relative to timing of transactions. If you are going to transact.
Why not finished this year and.
Get ahead of that can I say that is a significant driver yet probably not.
My personal view is theres, a long negotiation here to come on where that ends up and obviously if that and continues to end up on the the higher side of what proposed then I do think you'll potentially see.
Pretty big Rush for.
For more transactions.
Yes, I agree and I guess just on your business specifically you mean the.
Don't know if its possible to break out like what percentage is your sponsor backed versus.
You are privately held or or family owned.
Assuming the price some nuance in terms of like the considerations there but.
Yes.
And I agree and will be of negotiation, but that would be helpful.
Yes.
I would say on on our M&A business.
The sponsored private equity.
Of.
Mix has continued to grow I mean, it's really active across all of our industry teams now certainly.
Especially outside of banking depository, obviously that business is very much of strategic corporate business parts of our health care business are very much of a strategic corporate business all of that being said, we definitely do transactions for family owned businesses, where there is no.
Not a lot of private equity involved but I would say that's definitely a minority of transactions compared to those other two categories.
Yes, okay.
I appreciate it.
Thank you.
There are no other questions in queue I'd like to turn the call back to Mr. Abraham for any closing remarks.
Okay. Thanks, operator, I'd like to close by thanking all of my employee partners for their hard work and dedication to our clients I would like to thank everyone that joined we very much look forward to updating you on our second quarter results have a great day and a good weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Yeah.