Q2 2022 Perella Weinberg Partners Earnings Call
Good morning, and welcome to the Perella Weinberg partners second quarter 2022 earnings Conference call. Currently all callers have been placed in a listen only mode and following management's prepared remarks, the call will be opened up for your questions.
We would like to ask a question at that time. Please press star one on your telephone keypad, if you need to remove yourself from the queue Press star two.
Any time, if you should need operator assistance press Star Zero. Please be advised that today's call is being recorded I will now turn the call over to Taylor Reinhart head of Investor Relations you may begin.
Thank you operator, and welcome to our second quarter 2022 earnings call. Joining me today are Peter Weinberger, Chief Executive Officer, and Gary Brandt, Chief Financial Officer.
A replay of this call will be available through the investors page of the company's website approximately two hours. Following the conclusion of this live broadcast through August 11 2022.
Those of you listening to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today August four 2022 and have not been updated subsequent to the initial earnings call.
Before we begin I'd.
I'd like to note that this call may contain forward looking statements, including Pwc is expectations of future financial and business performance and conditions and industry outlook.
We're looking statements are inherently subject to risks uncertainties and assumptions that could cause actual results to differ materially from those discussed in the forward looking statements and are not guarantees of future events or performance.
Please refer to Pwc's, most recent SEC filings for a discussion of certain of these risks and uncertainties.
The forward looking statements are based on our current beliefs and expectations and the firm undertakes no obligation to update any forward looking statements during.
During the call. There will also be a discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business.
WP has reconciled these items to the most comparable GAAP measures in the press release filed with today's form 8-K, which can be found on the Companys website I will now turn the call over to Peter Weinberg to discuss our results.
Thank you Taylor and good morning, and thank you all for joining us on our second quarter 2022 earnings call.
Before I give some color on our financial performance on the occasion of being public for just over a year I wanted to put into context, our aspiration and journey to become the leading global independent advisory firm.
When we first approached public market investors in the fall of 2020, we articulated a very precise vision for our firm.
To grow our leading independent advisory franchise by broadening and deepening client relationships by expanding the suite of our advisory services and by adding best in class talent to the team.
We saw an enormous market opportunity and we felt the perm was exceptionally well positioned to capitalize upon it our pursuit of that goal would remain undaunted and grooming operating environments and in stressed economic times.
Well, we've tested the book ends of those extremes in our public life in 2021 Global M&A volume was at a record five eight trillion dollars.
Our revenues were up over 50% and our earnings were up over four times the prior period.
In 2022, we're facing very stressed macroeconomic and geopolitical conditions without any clear indication of improvement in the near term.
Our mindset in this volatile and challenging environment is that the opportunity for our firm is greater even than it would have been more stable and robust economic environments.
We're focused on leaning into this market investing and capitalizing intelligently.
So that when the clouds eventually part our positioning has only strengthened.
We continue to attract great talent to the firm from universities, all the way up to partner.
Particularly with senior bankers, we're finding our access and yield has never been higher.
Since 2020, we've added 16 advisory partners in 2022, so far we've promoted three advisory partners from within the firm and another five have either joined or agreed to join the firm.
Every one of these additions were in high activity industry sub sectors and product areas that we have strategically targeted years ago, including private capital placement and capital structure solutions.
Looking forward, we continue to have a clear roadmap of where and when we want to grow to meet our mission.
Strategic dialogue with our clients around the World has remained extremely active yet transaction announcement and closing timelines are elongated compared to prior periods. The number of new clients retaining our services remains robust and we are continuing to see high levels of <unk>.
<unk> across our platform.
There has been an understandable increase and focus from the investment community on the timing of a pickup in restructuring activity and the potential contribution of this revenue stream.
Today, even more so than three months ago, we're seeing the combination of inflation rising rates and supply chain issues, putting pressure on balance sheets.
And causing increased demand for liability management services, while liability management and restructuring mandates and fee events can take time to materialize. We are seeing an increase in these conversations which we believe may contribute favorably to our 2023 results.
This environment also creates opportunities for the firm as we return capital to shareholders year to date. In addition to the funding of our quarterly dividend. We have bought back 15% of our total class a common shares outstanding based on our March 31, 2022 basic share.
Count via open market repurchases of net settled shares to satisfy employee tax obligations in lieu of share issuances upon vesting of equity grants.
Collectively we've returned nearly $70 million in capital. Additionally, we announced the commencement of an exchange offer for our warrants into common shares Gary will go into more detail on these matters in a minute.
Now turning to the quarter. This morning, we reported second quarter revenues of $151 million about flat with our first quarter results. Our second quarter revenues turned out to be well higher than we had anticipated on our first quarter earnings call I would characterize this improvement is primarily.
Due to timing, we currently expect revenues for the back half of the year to be relatively in line with our first half results, but transaction timing and changes in market conditions could impact this expectation in either direction.
To wrap up we believe we are on a path of sustained long term growth and are continuing to invest in our future by expanding our capabilities and reach.
<unk> a more muted M&A activity have allowed us the opportunity to aggressively invest in talent and we expect to take advantage of todays market and use it as an accelerant to grow our market share and scale. We believe the opportunities in front of us are enormous and we will provide many years of future growth potential.
No Gary I will turn it over to you.
Thank you Peter as Peter mentioned revenues for the second quarter totaled $151 million, a decrease of 41% from the prior year period.
First half revenues were $303 million, a decrease of 29% from the prior year.
Our prior period results presented us with challenging comparisons with record setting performance in the second quarter of 2021, driven by an elevated level of large fee transactions.
Year over year declines for both periods was driven by a reduction in activity across the platform, particularly in mergers and acquisition advice relative to record 2021 results.
Our second quarter and first half saw fewer advisory transaction completions and a decrease in average fee size per client. Our second quarter results included a recognized the revenue amount of $8 million from a transaction that closed at the start of the third quarter in line with relevant accounting policies. This compares to $17 million, which was <unk>.
Similarly recognized in the prior year period.
First quarter periods did not include any transaction fee revenue from closings early in the second quarter of 2022.
My following comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of the business, our GAAP measures and a reconciliation of GAAP to adjusted results can be found in our earnings press release, which is on our website.
On the expense side in the second quarter, we accrued adjusted compensation expense was 64% of revenues will continue to evaluate the business environment as the year progresses, but expect that our full year adjusted compensation expense margin will be in line with our prior medium term guidance of a mid <unk> ratio.
Our adjusted non compensation expense was $31 million for the second quarter up 4% year over year, although down 4% quarter over quarter and represented 21% of our revenues.
We currently expect our full year 2022, non compensation expense exclusive of travel meals and entertainment to be in the range of $120 million to $125 million.
Which is below our previous estimate.
We saw <unk> pick up a bit in the second quarter, but just over $1 $2 million per month, and while this level and may be more representative of the new normal is still remains about 25% below our pre COVID-19 2019 average run rate of $1 $6 million per month.
As discussed on prior calls lease explorations combined with our significant recent and anticipated growth has necessitated adding space and both are in London, and New York headquarters. These two real estate projects will provide an increase of nearly 20% over the amount of space currently occupied by Pwc's advisory businesses and those sit.
<unk>.
In spite of taking on additional space, our run rate GAAP lease expense per square foot will be significantly less under the new leases and under the old leases.
In the near term, we will incur some onetime accounting double rent related to the new leases in both locations.
London, we plan to relocate to a new building in early 2023, and expect to incur $1 $5 million in double rent for accounting purposes for the period July 2022 through January 2023.
New York, we are expanding our space in our current building and expect to complete renovations at September 2023.
And this location, we expect to incur $5 $4 million in double rent for accounting purposes for the period September 2022 through September 2023.
Firms out of pocket build out costs related to these headquarters are expected to be in excess of $50 million further mitigated by over $20 million in free rent.
We reported adjusted operating income of $23 million in the second quarter and an adjusted operating margin of 15, 4%.
Our adjusted non operating income of $5 million for the second quarter and $7 million for the first half included approximately $4 million and $5 million, respectively of net gains related to FX revaluation and realizations.
The majority of this income resulted from our foreign subsidiaries holding dollar denominated cash and net intercompany receivables of $1 strengthened significantly during the period.
Because our consolidated financials are reported in dollars. We don't believe that these types of FX gains or losses on a dollar denominated financial assets of our foreign subsidiaries have economic substance to our consolidated business.
Adjusted net income totaled $23 million for the second quarter, our adjusted if converted net income for the second quarter was $20 million and presents our results as if all partnership units had converted to shares of common stock.
Adjusted diluted if converted net income per class a share was 22 for the three months ended June 32022.
For the year to date period, our adjusted assets converted tax rate was approximately 29% moderately below our rate in the first quarter.
Our asset converted tax rate as a theoretical figure as it is computed ignoring certain GAAP items excluded in our adjusted reporting which may have positive or negative tax attributes.
In addition, it assumes all partnership units were exchanged for shares of the company's class a common stock, resulting in all the company's income being subject to corporate level tax.
Peter mentioned in his remarks in 2020, we laid out a very clear vision for the firm and important component of that vision with the intention that over the long term, we would return significant capital to our shareholders.
The recent environment has provided a very attractive opportunity to return capital through share repurchases as well as dividends as.
As such year to date, we've returned nearly $70 million through the repurchase of more than 7 million shares in the open market.
That settlement of over 600000 shares to satisfy tax obligations in lieu of share issuances.
And the payment of $13 million in pro rata distributions to limited partners, which allowed <unk> to pay its dividends of $6 6 million to.
To date, we've utilized approximately 50% of our $100 million repurchase authorization, which commenced at the end of March.
Board has declared a quarterly dividend of <unk> <unk> per share payable on September 12, 2022 to holders of record as of September <unk> 2022.
As of June 32022, we held $265 million of cash cash equivalents and short term investments and U S Treasury Securities.
Debt.
It had an undrawn revolving credit facility.
Finally on July 20, <unk>, we announced the commencement of an exchange offer and consent solicitation related to our outstanding warrants.
We're offering to all of our it holders the opportunity to receive 0.2 shares of class a common stock in exchange for each warrant tendered and exchanged.
100% to $7 8 million warrants outstanding were to be elected for exchange at this ratio. We would issue about one 6 million shares of class a common stock to satisfy the exchange.
Under offer is set to expire on August 18th 2022.
Before we open the line for questions, Let me turn the call back over to Peter.
Gary. Thank you I would just conclude by saying that these are tough days for our industry for our clients and for many people around the world.
We believe our business model and our firm will sustain in any economic environment and we are steadfast in our commitment to provide long term growth.
Operator, we can now open it up for questions.
At this time, if you wish to ask a question. Please press star one on your telephone keypad.
You may remove yourself from the queue by pressing star two.
We will take our first question from Devin Ryan with JMP Securities.
Good morning, Peter and Gerry how are you.
So devin good morning.
I appreciate the outlook, particularly for the back half of the year from the outside what we're tracking that the pipeline looks like.
Hanging in pretty well, maybe even growing a bit.
But at the same time, we are hearing from a lot of your peers about the elongation of just timing of deals and kind of moving through pipeline to closing. So question is if you can just touch on how you would actually characterize the pipeline itself and then related when you think about the back half outlook does that imply the elongation theme continue.
News gets worse.
Are there any maybe early green shoots that the market could be moving into a better balance as well.
Sure. So I would say from an overall perspective that I am enthusiastic about our sector and our firm in the intermediate and longer term, but really remain cautious.
In the short and the short term.
We are still not out of the woods, yet by any means with respect to this environment.
As you all know well.
We have higher cost of capital now in the system, both on the credit side and the equity side vol.
Volatility uncertainty has shaken confidence really all caused by macroeconomic factors.
Having.
Said that I do feel there are some positives as you rightly point out our pipeline.
Is only slightly below where it was last year, our backlog is materially lower and that really encapsulates the environment. We're in to the extent that we're all very busy.
But it takes longer and it's tougher to close transactions.
I would also add that the intent of our clients has not changed in other words, a good idea last year remains a good idea today would just be maybe more complex to execute.
And the other force that we're seeing is and I've seen this in many other crises that I've been in over the years is that activity is really being driven by the very strong who feel that they can capitalize upon their strength to achieve certain strategic objectives.
Or the very weak who were forced into two executing transactions really as a matter of survival. So that's what we see for the rest of the year.
Okay terrific. Thanks for the color Peter and then maybe just one for Gary.
On share repurchases I think people are very pleased to see how aggressive the company's been leaning in.
Particularly in this environment.
Share price if the stock remains.
Call it in a similar ballpark.
Could we see a similar pace to the first half first half of the year continue on with purchases and just how are you thinking about capacity beyond this for $100 million just considering some of the other moving parts you've highlighted like the space build out the flip side as youre still generating very strong cash flow even in this environment. Thank you.
Yes, Thank you Devin.
Our commitment to returning excess capital to shareholders over the long term is obviously core to our strategy.
That said, we really don't comment on the specific cadence of the anticipated repurchases going forward or potential changes that our board may want to approve in terms of.
Future increases to the to the current program.
I will say in kind of reiterate.
The environment as you mentioned was quite attractive for share repurchases in the quarter not.
Not only due to where the stock price wise that we think is a very attractive purchase.
At this point.
But also just that we had relatively high trading volume in the quarter, which we think was largely driven by folks who were.
Some of our shareholders, particularly hedge fund shareholder, we're exiting and so that provided us an opportunity in the quarter as well.
We have repurchased as Peter mentioned about 15% of our class a common so we're kind of mindful of liquidity as well and so those are all considerations that as we think about the future we will keep in mind.
Okay, perfect I'll leave it there thanks guys.
Yes.
We will take our next question for Richard Ramsden with Goldman Sachs.
Good morning, Peter and Gerry So Peter maybe you can just talk a little bit about the relative engagement.
From corporates. This is financial sponsors and how that's evolved over the course of the year on what Youre expecting in the second half and I'm, particularly interested in how youre thinking about the change in financing conditions for those two clients sub segments and how you think that's going to impact activity as you think about the next six months.
Sure.
So with respect to sponsors, let's not forget that there is one five to two trillion.
Dry powder out there, which at the moment is very much on the sidelines, but it's certainly not going away.
It actually felt.
A couple of months ago that the decrease in valuations.
Outweigh the increase in the cost of credit.
And that activity would result that really has not been the case, yet with respect to initiation.
There's still a lot of activity in the sponsor ecosystem, but it is not as much on new deals.
We believe that equilibrium will at some point reach the marketplace and transactions will occur were still in that uncomfortable phase of its difficult to achieve price discovery.
The financing conditions are theres enormous financing capacity.
In the market.
Just.
And right now it has a low risk tolerance. So we think that that market is.
Kind of a coiled spring.
But it is unclear when it will kind of take effect and thats our experience in the market so far as it relates to sponsors.
Okay. That's helpful and then maybe as a follow up.
The more difficult financing conditions, hoping the capital advisory business, maybe you could talk a little bit about the dynamics within that business and as that is the growth rate in that business different to what you would've thought three or six months ago.
Yes that theme that you identify is absolutely evident in our business I mean, we really look at our.
Debt advisory and capital solutions business sort of under one umbrella.
And whether thats in the restructuring space or advising companies on issuing credit or.
Advising on an equity and so it is it is more active now because that topic is very much a strategic topic with almost all our clients right now and that that is different than it was I would say six months ago and has indeed increased the dialog on that subject with our clients.
We will take our next question from Stephen <unk> with Wolfe Research.
Hey, good morning, Peter Good morning, Gary.
Good morning, Steve.
Maybe.
Somewhat more nuanced question just on the advisory outlook by geography, certainly, especially in light of.
This morning's announcement.
UK.
Reinforcing just elevated recession risk it feels like that's a broader concern as it relates to Europe , you do have a pretty strong franchise in the region. I was hoping you could just provide some context as to how youre thinking about the advisory outlook across the different geographies.
Sure. So Europe right now is really kind of a tale of two cities.
One hand.
It's a perfect storm the war in Ukraine enormous disruption in the energy complex.
Very high stress and sovereign budgets and sovereign debt levels and add to that all the things that we're dealing with here in terms of the recession inflation supply chain and everything else. So on one hand, it's kind of a perfect storm over there on the other hand.
And this has been a very interesting development for us which is that there are areas of urgency with which propel activity in Europe , you'll notice that the numbers I don't want to over interpret July but the July M&A numbers in the whole market in Europe are actually quite a bit more attractive than the.
U S and we believe that's due to this.
Areas of urgency, which are propelling activity for example energy transition.
Whether it's renewables or.
Energy tech or hydrogen or electronic.
EV infrastructure.
That is propelling activity also large companies looking to raise capital who may not be able to raise it in the financial markets.
Our selling assets.
And in the infrastructure space.
Europe is behind and consolidation telecom banks et cetera, and there is a much.
Higher level.
Startups in Fintech in mobility in health care. So it's an interesting market, where there are plenty of concerns as you rightly point out but theres also another side of the story and that's keeping us busy over there.
Thanks for that color and for my follow up Peter you had mentioned that Youre looking to take advantage of some of the.
Recent disruption and investment opportunities that might be emerging.
Was hoping you could provide some context as to what level of gross partner ads, we should be contemplating and whether you can sustain a 64% comp accrual while leaning into some of those investment opportunities.
Given the more challenging revenue backdrop you sided.
Yes.
So this year just to just to level set.
We have either elevated or hired or have agreed to hire eight partners.
Three our promoted from within the firm and five are either here or have agreed to join.
Last year.
The apples to apples number to eight was 10.
Elevated three partners internally and hired seven.
And we're not finished in the year yet of course, we are only in August .
We definitely have our eye on a very specific growth plan in the firm. Its the same plan that we articulated when we entered the public market and we will continue to hire partners we feel that.
They are.
Open to conversations almost without exception and we think there is still an enormous supply of bankers, who will enter the independent space, whether it's us or someone else. So so that's R. R.
Our strategy is very much to grow through the hiring of partners and we will continue to do that yes.
Yes, Peter I, just add on comp margin as you saw we've continued to accrue for the year at 64% that's sort of our best estimate as of today.
I think our view for the year as we are still quite comfortable with our medium term guidance, which is a mid <unk> comp ratio, we're not going to get more specific than that right now but.
But that's really kind of the state of where we see things today.
Helpful color. Thanks, so much for taking my questions.
Thank you Steve.
We will take our next question from Michael Brown with K B W.
Hi, good morning.
Good morning.
So Peter I appreciate the commentary on the on the restructuring business and the latest trend that Youre seeing there and you noted that there is a potential for some pickup in 2023.
Can you just talk about the size of that restructuring and debt advisory business either in terms of the revenue contribution or the dedicated partner head count for that that business is we try to think about what that potential.
Potential lift could be next year.
Sure.
To your specific question, we have seven partners in our restructuring business and we have a broader set of partners and our overall capital solutions business.
<unk> really covers the broad topic of credit.
Advice with respect to our clients.
I will just make a comment on the restructuring opportunity and elaborate a bit.
I said a minute ago.
Right now.
The stressed companies are still benefiting from the capital that was available to them last year and before.
But the reason that were positive ultimately on the restructuring opportunity is because right now the high yield index is 300 or so basis points higher.
Then it was.
But for even more stressed companies say triple C companies.
Interest rates are two times, what they were so thats going to.
Cause a challenged particularly when you look at maturities coming forward.
Both high yield bonds and leveraged loans, which in the next three years is almost 700 billion.
And so we feel that our firm is well positioned for that as I said, it's not going to happen tomorrow because.
The capital that was raised last year and before but we do believe it's coming.
The one thing I might add to that Peter is I think our visibility on that.
Isn't isn't tremendous right now in other words.
A lot of these companies have a little bit of that breathing room that Peter just alluded to.
If there is a pretty material improvement in rates and in the environment in the meantime, and then obviously it could work the other way in terms of resurgence in activity next year. It's we're in a very volatile environment and so I think how how large a contributor restructuring ends up being next year is going to be.
The slate is going to be very dependent on what happens in the environment in the interim.
I guess, if you had to frame it maybe historically.
Understand your business has been evolving quite a lot over the last few years, but if you could frame. It historically I guess what has been.
A rough contribution and then.
When you're when you're when you're thinking about the restructuring outlook here is there any any additional color on where youre seeing some of that opportunity im sure its across.
Sectors, but is it potentially going to pick up more in Europe first and then the U S.
Any view on rest of world here.
Any additional color would be would be helpful.
Sure. So so we don't disclose as you know the contribution of our restructuring business or credit advisory business.
To the total.
But what I will say is that.
If you look at the market.
And you look at the industries that are most represented in the distressed category. So.
I believe that approximately half of all Triple C credits.
Leverage loans trading at less than 80 or in the TMT space, the healthcare space and the industrial space in that order and so that's as good a proxy as any as to the areas of activity in the restructuring space going forward.
Thanks, Peter very very interesting.
Maybe just one clarification for Gary.
Second half guidance on the revenues is it fair to expect that that's a bit more fourth quarter weighted just given the seasonality of advisory typically.
I think look as you've seen from this recent quarter the ability to predict revenue timing quarter to quarter is not great. So I'm not going to go out on the limb and tell you what I think the allocation is going to be between Q3 and Q4.
Okay understood. Thank you for taking my questions.
Okay. Thank you.
This concludes the Q&A portion of today's call I would now like to turn the call back over to Peter Weinberg for any additional or closing remarks.
Great. Thanks, operator, thank you everybody for joining the call. We appreciate it please feel free to follow up with our team and.
And we look forward to chatting with you at the next quarter.
This concludes the Perella Weinberg partners second quarter 2022 earnings call and webcast. You may disconnect. Your lines at this time and have a wonderful day.
Goodbye.
[music].
The COVID-19.
[music].
Okay.
[music].
Okay.
Okay.
[music].