Q3 2021 PJT Partners Inc Earnings Call
Good day and welcome to the P. J P partners third quarter 2021 earnings calls.
Today's conference is being recorded.
At this time I would like to turn the conference over to Shannon Pearson head of Investor Relations. Please go ahead.
Thank you very much good morning, and welcome to the P. J T partners third quarter 2021 earnings Conference call.
And Sharon Pearson head of Investor Relations at P. J T partners.
And joining me today is Paul Taubman, our chairman and Chief Executive Officer, and Helen <unk>, Our Chief Financial Officer.
I turn the call over to Paul I want to point out that during the course of this conference call. We may make a 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 to differ materially from those indicated in these statements.
We believe that these factors are described in the risk factors section contained in P. J T partners Twenty-twenty Form 10-K, which is available on our web site at P. J T partners Dot com.
I want to remind you that the company assumes no duty to update any forward looking statements.
And at the presentation, we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance.
For detailed disclosures on these non-GAAP metrics and their GAAP reconciliations you should refer to the financial data contained within the press release, we issued this morning, which is also available on our website and with that I'll turn the call over to Paul.
Thank you Sharon good morning, Thank you all for joining us today.
Before we review our quarterly results I wanted to provide some high level commentary about each of our businesses.
This year strategic advisory.
P J J Park Hill.
And P J G Camber view.
All growing significantly and we will deliver record performance.
And restructuring, while we continue to be quite bullish on the long term outlook.
The extraordinarily benign credit markets.
And the unprecedented fiscal and monetary policy support.
Has meaningfully dampened the current restructuring environment.
Against that backdrop, our 2021 restructuring revenues.
We'll return to 2019 levels.
As we discussed previously.
Last year's record third quarter restructuring results.
Present, us with particularly difficult comparisons.
This quarter's restructuring results reflect a nearly $100 million step down.
In restructuring revenues relative to last year's record setting performance.
Also weighing on this quarter's total results is the fact that our second half strategic advisory revenues will be heavily skewed towards the fourth quarter.
After Helen presents our three and nine months financial results.
I will review each of our businesses in greater detail.
Thank you Paul good morning, beginning with revenues.
Total revenues for the quarter with 200, and Sushi 1 million down 22% year over year Advisory revenues were 118 million down 61% year over year.
As Paul mentioned, while we experienced continued year over year growth in strategic advisory revenues.
Growth was masked by the nearly 100 million dollar decline and restructuring revenues from last year's record levels.
Placement revenues of 47 million up 48% year over year, driven by strong activity in pump placements.
For the nine months ended September Sushi total revenues were 679 million down 7% year over year Advisory revenues were 530 million down 16% similar to our third quarter results growth in strategic advisory revenues was more than offset that by a decline in restructuring revenues.
Placement revenues were 100, and sushi 8 million up 30% year over year, driven by higher fund placement fees.
Turning to expenses consistent with prior quarters, we presented the expenses with decision non-GAAP adjustments, which are more fully described in our 8-K first adjusted compensation expense.
Adjusted compensation expense continues to be accrued at 62.5%.
We review our comp estimate every quarter and 62.5% ratio represents our current best estimate for the compensation ratio for the full year.
Turning to adjusted non compensation expense total adjusted non compensation expense was 33 million for the third quarter and 19 3 million for the first nine months.
Increased senior adviser costs as well as increased expense relating to investments in I T and recruiting contributed to higher non comp expense in both the third quarter and the nine month periods. We also saw an increase in travel expenses third quarter. The business related travel activity is still tracking well below pre COVID-19 levels.
Turning to adjusted pretax income we reported adjusted pretax income of 54 million for the third quarter and 161 million for the nine months with an adjusted pretax margin of 23.3% for the third quarter and 23, 8% for the first nine months.
The provision for taxes as with prior quarters, we presented our results as if all partnership units had been converted to shares and that all of our income was taxed at a corporate tax rate.
We also annualize the tax benefit relating to the delivery of Vista shares during the first quarter of this year, we expect our effective tax rate for the full year to be 23%, which is just slightly above our previous estimate of 22, 8%.
Our adjusted if converted earnings were <unk> 98 cents per share for the third quarter and $2 93 per share for the first nine months.
For the quarter, our weighted average share count was 42 million shares during.
During the third quarter, we repurchased the equivalent of approximately 584000 shares through the exchange of partnership units for cash as well as through open market repurchases.
And our repurchases for the first nine months totaled approximately $2 9 million shares, including the exchange of approximately 1.3 million partnership units for cash.
We're currently in receipt of exchange notices for an additional 168000 partnership units and as we have done in the past we will exchange these units for cash.
On the balance sheet, we ended the quarter with $334 million in cash cash equivalents and short term investments.
And 229 million of networking capital and we have no funded debt outstanding.
Since quarter end, we've paid the previously announced special dividend of $3 per share for this quarter. The board has approved a dividend of five cents per share which is payable on December 22nd two class a common shareholders of record as of December 8th I'll now turn back to Paul.
Thank you Helen.
Now, let me provide a bit more detail on our businesses and our outlook.
Beginning with restructuring.
Given the extraordinarily benign credit backdrop global default rates have returned to pre COVID-19 levels.
And while we do not expect this market dynamic to persist for very long. It is the environment in which we currently operate.
Over the medium to long term, we continue to expect the fallout from COVID-19 to trigger an extended period of elevated restructuring activity.
The pandemic has inflicted damage at many companies with business models.
Located by changes in consumer behavior.
As well as accelerated technological innovation.
These challenges combined with the sheer quantum of debt outstanding will over time.
Result in significantly increased demand for our restructuring services.
We are already starting to see early signs of stress building in the system and we are engaging with clients around supply chain disruptions rising labor costs rising commodity prices and inflationary expectations that are beginning to build.
Our market, leading franchise remains well positioned for when the environment turns as it will and we continue to invest in the business.
Turning to P. J T Park Hill.
This year, our P. J T Park Hill business is delivering record performance and is benefiting from strong secular growth trends taking place in the alternative asset investment market.
On a macro basis managers or deploy capital at unprecedented rates.
And as a consequence, many are raising follow on funds more quickly and in larger size.
In this environment, our focus on best in class managers with differentiated fund strategies is a significant competitive advantage.
As our market, leading P. J T Park Hill franchise becomes even more aligned with our strategic advisory business we.
We are increasingly positioned to take advantage of expanded opportunities with financial sponsors and other asset managers.
Our business momentum is strong and looking ahead, we see additional opportunities to gain share.
Turning to strategic advisory.
In strategic advisory following a very strong 2020.
Where our growth rates were well ahead of market benchmarks.
We entered 2021 with a record number of mandates.
But with fewer transactions that had been announced and we're awaiting closing.
Since then we have seen a steady increase in our mandate count.
Up nearly 30% through the nine months.
And the pace of announced transactions measured by dollar value and number is tracking well ahead of last year's levels.
We expect our momentum in strategic advisory to translate into significantly greater strategic advisory revenues in the fourth quarter and set us up well for next year.
P. J T. Camber view is also tracking to deliver record performance in 2021 and will enter 2022 with a record backlog.
Overall P. J T. Cab review is benefiting from its strong positioning is strategic I R E.
E S G and shareholder activism.
Looking ahead, we are poised to enter 2022 with a demonstrably stronger and more powerful firm than we began 2021.
And we remain extremely confident in our future growth prospects.
With that we will now take your questions.
Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one to ask a question.
Thank you.
Our first question today comes from Devin Ryan of JMP Securities.
Hey, great good morning, everyone.
Good morning, Devin good morning.
I want to start with a question on <unk>.
The outlook for our strategic advisory.
Looking at the presentation.
A quarter of the strategic advisory partners still have not been on the platform.
For two years. So there is still I think some maturing on P. J T platform can you maybe talk about a little bit about.
The production of that cohort relative to the other 75% that have been on the platform for more than two years.
How production tends to ramp here because it would seem that we're heading into 2022 with some productivity gains on kind of the younger cohort, but you know if there's any other context, you can give us would be helpful.
I mean.
I think all of our partners are showing increased productivity because it's not just whether you've been here for less than two years.
For more than two years, it's clear.
That our partners are taking a long term view.
We're investing in places where there is a long term opportunity to not only build a differentiated relationship.
But too but to generate outsized economic opportunities for our firm and that means not to chase necessarily.
What's right in front of you.
To aim high and the steering wheel and to add to look down the road and to make sure that you are building the long term trusted relationships and if you do that.
Inevitably your business ramps with a long term perspective that would be the first point and I think that's true of partners who are on for less than two years and partners who are on for more than two years. The second thing is in some of these verticals.
As we have begun to enter these verticals.
Every incremental partner that is added brings a disproportionate productivity gain to the overall franchise because sometimes.
It's the it's the third partner in our sector.
Where it all comes together and it's not that the third partner was was the most productive is that you needed to get to.
Two an efficient scale to do this and then what's also clear is everywhere. We compete we're better known theres more experience there's more productivity.
More prior experience with board members executives and the like so I think where we're very much in the early innings of getting the whole the full productivity ramp.
From from all of our partners and the reason why just to remind everyone. We always talked about pre and post two years in.
Is unless you are incredibly.
Fortunate.
The revenue given just the lead times to get a mandate and for mandates to to lead to announcements and announcements to turned to closings.
Theres, just a time lag where we don't expect much if any revenue in the first two years that doesn't mean that we magically have.
Fully mature partner when they're two years in one month.
And I see tremendous productivity gains across the across the field. So that that's how we think about it devin.
Okay. Thank you Paul very helpful. Just a follow up here on capital return.
I guess the outlook there, obviously now that you've paid out $3 special and as we think about kind of the next chapter if you will for P. J T.
Clearly firms are generating substantially more excess capital beyond.
The dividend. So how are you guys thinking about priorities at the moment and are there any areas that you feel more attractive and you should we be thinking about maybe more special dividends were greater buybacks or how should we be.
About kind of capital return priorities.
Well, we're still big believers in our franchise and in the value proposition.
So you should expect us to continue to be aggressive repurchases of shares and share equivalents.
One of the reasons why all of that aggressive share repurchase hasn't translated into reduced share count is because over the last six years a lot of the earn outs have been triggered and on a going forward basis, you won't have that to the same extent so we're actually.
Are they going to most likely end up with with reduced share count not just maintaining share count I think thats, probably going to be our focus we.
We do at some point need to figure out as a companion, whether we want to increase the dividend on the ordinary basis or.
As periodic specials.
And I think it's probably a bit early to make that a decision but at some point, we'll we'll probably have a fork in the road and we'll we'll had one place or the other and I think we'll we'll be informed by some of the conversations we've begun to have an engaging with with our own shareowners, but I.
I would not want to suggest that our principal capital return is going to deviate from you know the investment that we feel most confident and which is repurchasing our own shares.
Okay terrific older. There. Thank you very much.
Thank you Devin.
Our next question comes from Richard Robinson of Goldman Sachs.
Hey, good morning, guys. So perhaps I can just start off with a bigger picture question, which is I look pull since you last spoke inflation expectations have picked up a lot the market's expectations for interest rates also moved up a lot both of the short and the long end of the curve.
As you think through both the positives and negatives of higher rates could you just talk about how you think it impacts each of your constituent businesses as we head into 2022.
Well I think there I think there's no doubt that <unk>.
Rising interest rates should create a more hospitable environment for restructuring right.
You've had incredibly receptive capital markets, everyone is chasing yields because you're chasing yield you're prepared to go further out on the risk continuum.
And that's that's not sustainable in the long term I do believe that there are a lot of companies, whose business models have been severely impacted by what has transpired over the last two years, who have been able to kick the can down the road because of extraordinarily benign.
On credit conditions.
And that in turn here with rates, so low has driven it.
So a risk off trade into equity markets and with capital. So plentiful that has probably pushed out.
Even more than we had anticipated it would be inevitable day of reckoning in restructuring so I would suspect.
That over time.
There needs to be a tipping point, but over time, you'll find a lot of companies, who will not be able to refinance won't be able to refinance at attractive terms and I think there's that issue I think there's also the issue of.
The trigger typically in restructuring is just a significant pivot.
And that's either because you're dealing with foreign exchange exposure and the exchange rates move against you or because your position one way with interest rates and rates move away from you or your position one way in terms of inflationary expectation at prices either fall.
In an unexpected way or they rise it's really if everything happens. According to plan then most companies are able to manage their plans. So you need shocks to the system.
To create real restructuring.
Activity and I suspect that some of those conditions are beginning to build.
Now the question then.
You know some of our other businesses as I think they are reasonably immune from you know movements there clearly in Park Hill.
Probably the mix of product.
Which managers, which strategies you bring to market will change over time.
As the macro environment changes, but I don't think it really affects.
The strides.
Or the momentum that we have in the park Hill business, but it probably means that we will continue to to pivot as to where there is the greatest.
Investor demand, and which asset managers, and which strategies, we bring to market.
I think clearly as the world becomes far more complex.
And stories are more difficult to convey to investors with ESG, becoming increasingly at the forefront with the need to to be able to engage with shareowners I think as the world becomes.
Bit less.
Predictable.
Then that probably benefits are our camera view business.
And on the strategic advisory side, I think within some degrees of freedom I don't see it meaningfully changing.
The basic thrust of you know.
Higher M&A activity, but clearly like everything there comes a tipping point.
Where you end up with a with some real headwinds. So I don't know if we are anywhere near that but at some point.
Theres enough disruption in the marketplace I suspect that will.
We will have a dampening effect on our strategic advisory, but the one point to make here is.
Two were meaningfully bigger as a strategic advisory franchise.
Our growth is going to be pretty much idiosyncratic and reasonably uncorrelated to the overall market.
Our growth.
Is really from a micro basis and that's why we've been able to grow every year and that's why we've been able to grow significantly and that's why in years like 2020, we've been able to grow at extraordinary levels when others haven't grown at all and that's why we're not.
As tied to the macro environment. So that's probably the one business where the macro environment is of a lesser concern because we really are disconnected from the from the broader market now at some point.
As we continue to grow at these very hefty rates, our strategic advisory business on.
On the M&A side will double Sensually from 2019 to 'twenty 'twenty. One if you keep doubling that business, we will get to a point at some point that we are representative of the broader market and we will then become more concerned about some of the macro trends, but right now we're very much a micro story.
That's very helpful. And then perhaps can I just ask a follow up on restructuring.
You said that your anticipation is that that business is going to run it closer to the 2019 level, but if you look at where you are in Q3 and perhaps your expectations for the second half of this year, we materially below the 2019 run rate and is it your expectation that it's going to stay there at least in the near term. Thanks.
Aye.
I'm loads to say it can't go any lower but I think we're reasonably confident in fact, we're highly confident that we'll end the year pretty much on top of 2019 levels.
And from there I view us have having essentially derisked the business.
Now that doesn't mean it could go a little bit lower but if if we were to get any headwinds in that business. It would be a fraction of the wins that have been blowing in our face in 2021, so whether it's the absolute bottom whether it could go a little bit lower that's much less of a concern but the quad.
One of them of any.
Any potential further.
Leg down in restructuring is a fraction of a what we've experienced this year.
Okay. That's very helpful. Thanks, a lot Paul.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one or.
Our next question today comes from Steven <unk> of Wolfe Research.
Hi, good morning.
Good morning, So Paul.
Yeah, I'm doing OK. Thanks so.
Paul I just wanted to unpack some of the commentary that you just conveyed around like the 30% increase in mandates on the M&A side, coupled with the fact that they're off restructuring business has been largely D. Rest I was hoping you could frame what the growth expectation is in 'twenty two versus 20.
Why you have confidence that the revenue growth should be materially better recognizing that 'twenty 'twenty was a year of particular strength for you guys 2021 maybe representing a little bit more of a transition year as we start to lap some of these tougher restructuring comps.
I think the best way to say it is if you look at our whatever our consolidated rate of growth is this year. If you were to unpack it relative to call it out for businesses.
I think it's representative of none of the four businesses.
It's literally the weighted average of the four businesses with three of them growing at healthy rates.
And one of them with very significant headwinds and when you put it all together.
And again, some weighted average of that and that's the business mix, but what you don't see in the consolidated numbers.
His significant momentum in our strategic advisory business.
P. J T camera view, our momentum and P. J T can review in our momentum in the P. J T Park Hill business. So.
Therefore, the consolidated number is really just a roll up of four businesses three that are growing at healthy rates and one that had very significant declines and we've already talked about the fact that it was.
Stepped down nearly $100 billion just in the third quarter.
Alone if you go forward to 2022 weeks.
We see the momentum in those three businesses continuing.
Into 2022 and presumably beyond.
But let's just talk about 2022 for now.
And while I don't know exactly what happens in restructuring next year.
We're going to move from most likely a very severe headwind to pretty much of a of a neutral.
Set of conditions. There. So then that weighted average is going to look very different than whatever it looks like for 2021.
And I don't want to lose sight of the fact that we have a leading restructuring practice.
But because it is.
It was so successful at acquiring all of these mandates and earlier than others and in a very large economic pool that they were able to capture.
We had extraordinary success.
And we're just dealing with writing down the macro but inevitably this market has got a term.
And when it does we're going to be even more powerful because every day that we build out the strategic advisory footprint that just means that we have another helping hand to help the restructuring folks run the table when the when the market turns so even though.
Quite neutral about the 2022 restructuring environment I don't view, the 22 restructuring environment of the 'twenty, one restructuring environment as what we're likely to see over the next number of years, because it's inevitable that there's going to be a pickup and we're gonna be extraordinarily well positioned to.
To capture that.
No that's really helpful color, Paul and maybe just for my follow up let's just call. It a tough but fair question I think one of the concerns that we've been hearing from folks is that.
You posted the best results of any firm that we track in 2020, 2021 it's been a little bit more tepid.
And the expectation is that some of the tailwind that we've seen in 'twenty, one whether it's European M&A.
Sponsor activity there are other competitors that are more indexed to some of those areas and you guys are stronger whether it be restructuring or large cap M&A, where activity is supposed to remain a little bit more tepid or a lukewarm and I was hoping you could just speak to where those concerns might be misguided from your point of view and just how you believe your position.
Relative to peer as competitively heading into next year and beyond.
Well.
I think about it very much on a micro basis not on a macro basis. The way we right now if you think about our firm.
As much growth as we have generated in terms of head count revenues market presence, we view ourselves as still in the early innings. So just to give you a perspective, our head count in our strategic advisory has quietly when no. One is looking grown 20% in the first.
Nine months of the year.
Okay.
We are continuing to grow at a significant clip we do not report our strategic advisory M&A revenues separately, but just to dimensionalize. It. If you look at the two years of the pandemic lockdown of 2020, one as a pair trade.
We came pretty close to or will double our strategic advisory revenues, which I put up against <unk>.
Anyone anywhere at the way we're doing that is we're not the market we're not yet in every industry vertical we're not in every geography, we're not anywhere near fully built out so our growth is going to be idiosyncratic. It's a function of the people on the platform their client focus and winning.
Since one at a time and as a result, I don't really spend a lot of time thinking about the market. We don't sit down at the beginning of the year and say, what's the market going to do.
And what is our share of that going to be.
We literally sit down banker by banker client by client and we continue to build relationships.
And if we focus on the revenue we're going to generate this year, then we're not being relationship oriented bankers. So we focus on the clients.
On becoming a trusted adviser.
On securing a mandate and then ultimately if you put enough of those planes up in the air a lot of a lot of good things are going to happen and that's one of the reasons why we spent so much time looking at mandate count because that's how many clients have selected us as their trusted adviser.
And how many mandates do we have because inevitably the more that we have of that and I'm not sure that.
That we really need to focus on what others are doing so I don't really spend a lot of time.
On on that what I do know is we're just getting started.
We have very significant growth. This year that is being masked by what is a very significant restructuring headwind and when that headwind stops blowing I think some of the earnings power of these other businesses.
We'll return to being more evident and as you track our six year history.
We have made continuous progress in building out the franchise.
How that has hit the bottom line has been anything but continues so that's that's who we are.
No that's really helpful. Paul I appreciate you sharing those insights and just one final one for me.
Do you acknowledge that the restructuring environment remains quite tepid, the one area or region I should say where activity is picking up meaningfully as China. Just wanted to understand in terms of your global footprint, how your per station positioning that leased to participate.
In.
Some of those revenue opportunities are starting to manifest.
Right, we do not talk about client mandates that we have but we are very focused on the region. We have footprint. There we have very senior connectivity we have.
A restructuring team that has done a lot in the Asia region, and you should assume that we're quite mindful of the opportunities.
Alright, thanks, so much for taking my questions.
Absolutely Steve.
As there are no further questions I'd like to hand, the call over to Paul Taubman for closing remarks.
I think this concludes our third quarter earnings review, we appreciate all of your interest and we look forward to speaking to you. When we report full year results in early 2022. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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