Q3 2022 Perella Weinberg Partners Earnings Call
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Good morning, and welcome to the Perella Weinberg partners third quarter 2022 earnings Conference call.
Currently all callers have been placed in a listen only mode and following the management's prepared remarks, the call will be opened for your questions. If you would like to ask a question at any time. Please press star one on your telephone keypad.
I'd like to remove yourself from the queue. Please press star two.
Anytime if you should need operator assistance, Please 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 third quarter 2022 earnings call. Joining me today are Peter Weinberg, Chief Executive Officer, Andrew <unk>, Our co President and Gary Brandt, Chief Financial Officer.
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 November 10, 2022 for those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today November three 2022 and have not been updated subsequent.
The initial earnings call.
Before we begin I would like to note that this call may contain forward looking statements, including pwc's expectations of future financial and business performance and conditions and industry outlook.
Forward 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.
These refer to <unk>, most recent SEC filings for a discussion of certain of these risks and uncertainties.
Forward looking statements are based on our current beliefs and expectations and the firm undertakes no obligation to update any forward looking statements.
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 company's website I will now turn the call over to Peter Weinberg to discuss our results.
Good morning, and thank you all for joining us on our third quarter 2022 earnings call.
This morning, we reported third quarter revenues of $145 million adjusted pre tax income of $31 million and adjusted EPS 26 cents per share.
Given the current environment, we are very pleased with the firm's performance not only in terms of year to date quarterly revenue stability, but also in terms of the significant client activity across our global platform.
Today, I would like to discuss the current market conditions.
Performance of the firm and how we are positioned for the future.
As it relates to today's macro environment, we are certainly not out of the woods yet.
Structural inflation is causing a significant increase in interest rates around the world both prices and new issues in the debt markets have declined significantly.
Particularly amongst more leveraged credits.
Equity markets have followed suit new issues have slowed to a trickle all of these factors plus macroeconomic and geopolitical sensitivities around the world have inflicted a blow to confidence amongst corporate leadership and investors Emma.
M&A is a symptom of that being down more than 30%. This year capital solutions advisory is a bright spot in our industry as it typically is when economies and markets are stress more on that in a moment.
Within the context of this environment there are two overarching themes for our firm.
The first being that complexity and stress create an enormous need for the type of advice that we provide.
Unlike prior down cycles, and I count eight since I got to Wall Street years ago, we find ourselves extremely busy and are actively engaged with clients across the business.
Our gross deal pipeline has been broadly stable year to date and can be characterized as extremely full but given elevated completion risk and a longer timeline to announcement and close our announced backlog is experiencing a step down SB events get pushed out.
As it relates to the areas of activity, we're seeing broad and healthy dialogue across our coverage and product areas.
We are especially encouraged by conversations in areas of recent investments, which are being driven by partners, who are not fully ramped on our platform.
More than a third of our partners have been in their current position for less than three years.
The second theme is something that you've heard us say before we are undaunted in our long term plan to grow and enhance our revenues and profitability our brand our product suite and our global footprint.
We continue to hire and promote partners and managing directors and are investing in talent in a disciplined manner.
We do not feel market share constrained either in our client businesses or in recruiting senior people from other firms quite the opposite we continue to see great opportunity in both of these growth engines in spite of the current environment.
In addition to building out our traditional M&A franchise in areas of strategic significance.
Our capital solutions Advisory business, which includes restructuring and liability management capital markets Advisory and private capital placement has been an investment area for the firm.
In this environment, we are having strategic conversations with nearly all of our clients on capital matters and we are seeing an increase in pitches and engagement letters and restructuring and liability management, which depending on the timing of the recovery is likely to show results and 2023.
Well I don't want to be in the business of predicting the future I do want to convey how we're thinking about and planning for it.
While most would agree that the market will bottom at some point the timing of a recovery in the financial markets and new issue financing and M&A activity is unknown and the precise catalyst is of course not clear.
We are in a slowing economic environment and we expect that rate rises will continue at least in the near term not only at the direction of the fed but from central banks around the world.
That said Ceos in the public equity and credit markets for that matter will quickly changed their sentiment as conditions improve.
We anticipate the return of confidence long before economic statistics see meaningful improvements and we believe that the resulting increase in visibility and predictability will translate into more favorable conditions.
We are focused on being ready for that across our businesses whenever it occurs with no debt and a strong cash position. We are poised to continue investing in our business and serving our clients and this extreme time of need.
And again on continuing to deliver on our plan put forward. When we became a public company. We are focused on returning capital to shareholders and simplifying the firm's capital structure.
Since the end of March we have utilized approximately 60% of our $100 million repurchase authorization and continue to see value in our stock. The successful completion of our warrant exchange eliminated the future potential dilutive impact of the $7 9 million warrants, which were previously outstanding.
Lastly, I want to say a few things about the leadership transition that we announced in late September regarding Andrew Bednarz, succeeding me as CEO come January one.
I have known Andrew for 25 years, having medic Goldman Sachs in the early days. In addition to Andrew is exceptional skills as an investment banker. He has proven to be an excellent manager and leader as co president of the firm for the last two and a half years.
The news of Andrews Ascension has been very well received by our team and clients alike and justly. So as a shareholder a founder with continuing partners' Chairman I believe the Perm has never been better positioned than it is today.
On that note I will turn it over to Gary to discuss our results in more detail.
Thank you Peter as Peter has already discussed our revenue performance I'll begin with a discussion of our expenses.
As a reminder, my comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of our 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 third quarter, we accrued adjusted compensation expense at 64% of revenues consistent with the first two quarters of 2022.
At the last quarter of the year plays out we will reassess this accrual rate for the full year based on the overall business environment, our investment in new talent and the compensation levels needed to retain key current talent.
While it's too early to make a call we could see the possibility of increasing our full year compensation ratio by up to a few percentage points, a year and depending on market conditions.
Our adjusted non compensation expense was $28 million for the third quarter down 16% year over year, and 10% quarter over quarter and represented 19% of our revenues relative.
Relative to the prior year quarter, our third quarter non compensation expense benefited from reduced legal consulting and D&O insurance costs, which were incurred last year as a newly public company.
In addition in the third quarter as in prior quarters this year.
<unk> charges relating to our New York and London headquarters were unusually low as those offices are near the end of their lease periods on.
On the other hand, <unk> was up $1 3 million quarter over the prior year quarter with September <unk>, reaching $1 4 million versus the 2019 average of $1 6 million per month.
We foresee an increase in fourth quarter non compensation expense over the current quarter and expect that including travel meals and entertainment fourth quarter non comp spend will be in the range of 35% to $38 million.
This quarter over quarter increase is due mainly to increased professional fees related to discretionary year end payments for certain senior advisors as well as the onset of certain legal projects technology expense higher TNT versus the summer period, and a full quarter of overlapping GAAP rent for our current space and new space in New York and London.
Even with this anticipated sequential quarterly increase in non comp expense in Q4, our full year 2022, non compensation expenses is coming in well below our prior expectations.
Looking ahead, we expect an increase in 2023 non comp spending over the current year due to an anticipated three quarters of overlapping GAAP rent in New York higher DNA as our two headquarter build outs are completed some increase in technology related investments and some assumes continued increase in DNA.
At the same time, we're aggressively looking for opportunities to realize cost savings without impacting the strength and growth of our business.
We reported adjusted operating income of $25 million in the third quarter and an adjusted operating margin of 13, 9%.
Our adjusted non operating income of $7 million for the third quarter and $14 million for the first nine months included approximately $6 million and $11 million, respectively of net gains related to FX revaluation and realizations.
As in the prior quarter. The majority of this income resulted from how we must account for currency revaluation of our foreign subsidiaries, which hold dollar denominated cash or net intercompany receivables.
The strengthening dollar created significant unrealized FX gains the majority of which we believe does not have economic substance to our consolidated business given that we report in dollars.
Adjusted net income totaled $26 million for the third quarter, our adjusted if converted net income for the third quarter was $23 million and presents our results because it all partnership units have converted to shares of common stock.
Adjusted diluted if converted net income per class a share was 26 for the three months ended September 32022.
For the year to date period, our adjusted assets converted tax rate.
It was approximately 29% relatively in line with our expectation at June 30.
On capital management year to date, we've returned nearly $87 million through the repurchase of approximately eight 5 million shares in the open market. The net settlement of nearly 1 million shares to satisfy tax obligations and we would share issuances and the payment of $19 $1 million in pro rata distributions to limited partner.
<unk>, which allowed <unk> to pay its dividends.
Dividends of $9 9 million.
The board has declared a quarterly dividend of <unk> <unk> per share payable on December 19, 2022 to holders of record as of November 25 2022.
As of September 32022, we held $282 million of cash cash equivalents and short term investments and U S. Treasury Securities. We had no debt and have an undrawn revolving credit facility.
With that let me turn the call back to Peter.
Thank you Gary.
Before we open the line for questions. Andrew If you could say a few words great. Thank you Peter I, just wanted to say that I'm excited and honored to serve and lead the firm through our next phase of growth and development 10, I'm, especially looking forward to working closely with our exceptional talent across the firm who embody <unk> values of trust in <unk>.
Aggregate and teamwork and who deliver for our clients every day.
I also look forward to engaging more with our shareholders and the analyst community as I transition into my new role.
Lastly, I strongly echo Peter's sentiment that the firm has never been better positioned.
And we will continue working hard to maintain <unk> position as a top choice for exceptional finance talent to deliver superior results for our clients and to create long term value for our shareholders.
Operator, we can now open it up for questions. Thank you very much.
Thank you at this time, if you would like to ask a question. Please press star.
Telephone keypad.
Thanks Preston.
Pressing star two.
Our first question will come from Devin Ryan with JMP Securities. Your line is now open.
Hey, good morning, Peter Gary and congratulations Andrew.
Good morning.
First question.
I just wanted to kind of go to some of Peter's comments touching on the focus in growing non M&A advisory businesses, you mentioned capital advisory.
How should we think about how much bigger businesses could be or maybe you'd like to see them be relative to the overall franchise today, maybe the best way to think about it is all about head count basis and then.
Just the outlook for capital Advisors I appreciate you're probably seeing some improvement there as you mentioned how should we think about the order of magnitude.
Type of acceleration, you're seeing today, which sounds like it will be much more of a 2023 revenue story.
Yes, good morning Devin.
Yes, so just to level set I mean, this is really a very significant opportunity for the firm.
Clients, who are considering raising capital through an underwriting benefit from having an advisor who is not also an underwriter and this is really our kind of raise on that.
Current market conditions, amplify or accentuate that need because the alignment between underwriter and adviser as stress during times of stress so theres really.
This is a growth area for us we're building our business we're building our team in that area and it's a very exciting area. Another reason why this is exciting for us is that the as the privatization.
The credit markets in the sense that also creates opportunities for independent advisers, because no underwriter as necessary. We could of course actors placement agent in this large and growing segment of the credit market, which has taken on even more importance as the public markets have seized up so we don't disclose.
Specifics on percentage of revenues, but it's one of our top initiatives right now on the firm.
Okay, great. Thanks, Peter.
One probably for Gary here, so $282 million in cash I believe into the quarter.
<unk> comments desire to return kind of the excess.
How should we think about.
How much is excess here.
At a high level I appreciate you have to pay bonuses office expansion recruiting et cetera, like how much is excess and then just the slower pace of repurchases in the third quarter was that market dynamic.
Obviously buyback restrictions or was that just.
Given how much you've done in the first half or how should we think about kind of maybe slower pace of third quarter, then what that translates to for the outlook as well.
Sure David.
Your first point.
Look I think on the excess cash question Youre really kind of right in terms of how we think of it.
Just kind of thinking about our base needs for retaining cash which are obviously working capital needs. We do have.
The build outs that we have which were still reserving some cash for the build outs.
And importantly, we want to keep some liquidity for investment purposes, and that can be some general investment in talented can be.
Broadly if we see opportunities and so those are all things that we keep in mind.
I think the.
That is going to be a moving target and what we see as excess at any one point in time accrued comp, but obviously the other component, which you mentioned it correctly.
So I think all we can really say is over the long term we're again.
We're not retaining cash we're going to continue our approach here and as it relates to the repurchases to kind of dovetail onto your second question here.
That is something that we look at not only by by seeing where our liquidity is at any time, but it is a little bit opportunistic in terms of where the market is thats a part of it.
I don't really want to give specific pacing guidance on that because we wanted to have the flexibility to do what's right for the business. The right time, but I will tell you just just to kind of give another metric that.
For the quarter to date, so far this year, we spent about another $5 million in the month of October just to give you some sense.
Okay terrific and then just.
Last couple of quick clarifications. So Peter you talked about I think the pipeline holding steady I just wanted to make sure we understand that youre, referring to mandates the mandates I'm assuming that the FERC is on but it's just taking longer.
Complicated just to get to a formal announcement, which is maybe what we see in the public domain, but the mandates are holding steady just want make sure I understand the pipeline comment.
And then also to Gary's comment on the comp ratio as the takeaway the fourth quarter could be up a few percent or in the fourth quarter. The full year could be 2% to make sure I heard that correctly. Thanks.
So let me Devin I'll answer the first question and I'll ask Gary to answer the second.
Describe the difference between pipeline and backlog accurately pipeline is really the gross.
Picture of our of our.
Our engagements going forward.
Mandates.
And otherwise but.
It's maintained a very strong level and is only slightly down from last year. The net backlog is.
Lower and Thats for the reasons you cited because of elongation of deal closings and just a difficult financing markets.
And our comment on my comment on the comp ratio was the full year accrual rate.
Actually being up.
3%.
Got it okay alright, thank you very much appreciate it.
Thank you.
Thank you. Our next question will come from James <unk> with Goldman Sachs. Your line is now open.
Good morning, and thanks for taking my questions I just wanted to start with the rates environment here, maybe you could just talk about.
Whether you think there is some sort of absolute level of rates that permanently changes the cadence of advisory activity, whether you think those higher rates are baked in and then maybe if you could just differentiate between sponsors and strategics and specifically I think the question is when the financing markets reopen do you think that sponsors.
We'll do a structurally less M&A and.
Strategics will comprise a greater percentage of the market.
Good morning, James.
The way that we look at the financing markets right now and it's just a very simple sense is number one capital is less available to affect M&A.
Equity is more expensive the below investment grade credit markets are all but closed and even sponsor Lps are urging caution. So just availability is one issue.
Two capital is of course more expensive investment grade rates or two times, what they were at the beginning of the year same goes with below investment grade and of course equity is expensive the issue because it's cheaper.
And the third thing is the market volatility is obviously significant due to the macro uncertainty. So that's kind of where we are now I do not think theres a specific rate level.
Changes all that but.
We'll say that the sentiment as I mentioned in my comments can change quite quickly.
We still believe there is an enormous amount of capital out there there is by definition.
But it's.
It's paused.
Confidence can change quickly and strategic ambitions don't stop and so we think we just think a bit more of a stable market a bit more confidence.
We'll open the M&A market and financing as well.
Don't believe that the cost of that capital is going to come down significantly.
But I do believe that the markets will open.
With respect to your question on sponsors versus strategics, its very interesting right now because what we're seeing is.
As strategics or looking at assets, particularly the capital rich strategics.
And for the first time in a long time, they don't have a lot of competition from the sponsor community, which is a real asset for them.
That is a dynamic that we've seen in prior crises.
Where the capital rich have been transacting with the capital pour.
And the strong.
To do transactions.
That's really great context. Thank you for that maybe if I could just ask one more on Europe , which is sort of a two part I guess.
With higher rates and a stronger U S. Dollar is that catalyzing any activity into Europe , and then just broadly.
The most.
As part of the M&A market I'd say, so far this year, maybe you could just talk about whether that can continue into next year, given all the geopolitical and economic concerns over there.
Yes, so on your first question.
The dislocation in the foreign exchange markets has really been significant and it has indeed materially affected values I mean over the years when there have been small changes in currencies. It hasnt really affected M&A that much I think here it may well with respect to cross border conversations and we're certainly having.
Discussions in that regard.
I think with respect to Europe .
The way, we look at Europe is versus the U S is that they are really a couple of different parts of that number. One is is that there are some stresses which Europe and the U S share higher cost of capital availability and confidence as I've mentioned before.
Europe , though.
Sort of another set of stresses which is more severe than the U S. One is inflation is higher.
Energy insecurity is more profound darin more present.
The macro economy is weaker and as a result, we're finding our clients to be more inwardly focused there.
We're focused on in some cases solvency they are focused on <unk>.
People and their strategic ambitions are not extinguished, but they are delayed so we think.
Europe will continue to be active over time, but the short term stresses are significant and more so than the U S.
Thanks, a lot for taking my questions.
Thank you once again, if you'd like to ask a question. Please press star one to join the queue. Our next question will come from Mike Brown with <unk>. Your line is now open.
Alright, great. Thanks for taking my questions.
So last quarter, you guys talked about an expectation for the second half revenues to be relatively in line with the first half.
It looks like the third quarter came in better than we and the street were expecting so I just wanted to check if that's still the right expectation for for the full year here as we think as we think about the fourth quarter.
Hey, Mike Yes. It is our expectations are broadly the same as they were in the last quarter.
Okay great. Thank.
Hey, Gary I apologize I just wanted to make sure I got the comp ratio message correct can you can you just clarify that one more time is it up a couple percentage points in <unk> and then.
And then what does that imply it was a message about what that implies for the full year and then I guess just a follow on for that is.
Any initial thoughts on next year like what what's kind of driving that.
That potential increase is it just higher inflationary costs that.
Therefore have a bit of a run rate impact into next year as well.
So just on the mechanical question.
I had said was that we could see the potential of increasing our full year.
Comp ratio up to buy up to a few percentage points. So that would mean, if we did that it would be a larger fourth quarter hit to come up with the average for the year just on that on that question.
Yes.
I think on your other question about next year, it's really too early to tell and frankly part of why we.
We decided to keep our comp ratio for Q3 was we wanted to make sure. We have very good visibility on what's necessary for the full year and so obviously next year well next year is going to be something that we'll look at very closely based on conditions I will say that we are not changing our mid year or excuse me our midterm general comp.
So the mid $60, which is what we've said before.
Mike I'll also add to that keep in mind that 50% of the outstanding shares of our firm are owned by people who work here and so we're focused on both shareholders and employees because they are in many cases one of the same.
Okay, great. Thanks for taking my questions.
Thank you.
Thank you. Our next question will come from Steven <unk> with Wolfe Research. Your line is now open.
Good morning, This is Brendan O'brien filling in for Steven.
So to start.
One sector that continues to see relatively strong activities energy, which is an area of strength for you guys and with oil prices still hovering $90 a level, which you had previously said that these companies are generating significant amount of cash do you expect momentum in that business to <unk>.
<unk> in the immediate term.
Or do you expect with recessionary fears kind of weighing on oil prices, maybe they take a more cautious stance here.
Well.
<unk>.
With respect to the energy sector, one thing to start with on this question is that the leverage in that sector is dramatically down and the way we looked at it the leverage is kind of one times cash flow and so the restructuring opportunity that we saw years ago, we do not think.
We will be active going forward, but we do feel that the M&A opportunity continues to be significant.
The M&A market in energy, it's a big market and there are lots of different pieces to it across the different sectors of energy from upstream downstream services et cetera.
And there has not been a rebound in activity.
That has tracked the price increase like there have been an increasing price of oil environment.
But the message is not too different than it was last time in the sense that with all this excess cash flow energy companies continue to decide whether or not they want a distributed to shareholders through dividends or share repurchase or two.
Start on the acquisition trail and they continue to think that way.
There is lots of conversations.
About that and we're in the middle of many of them.
And then for my follow up.
So on about restructuring I was clear that the environment has improved we've heard some mixed messaging on activity levels in the U S and Europe .
I wanted to get a sense as to how you would compare activity into two regions and if you could remind us on your relative exposure to both of these areas within that business.
Yes, I would say overall with respect to restructuring.
The the opportunity is growing for companies who entered into this economic environment stress stressed.
Stresses multiplied not only with respect to interest cost floating rate interest cost, but also labor costs and supply chain costs and others not to mentioned revenue softening and so I would say overall.
The market is showing an interesting very interesting and growing opportunity and on top of all that.
Technological obsolescence, which is really touches many many different industries and create stress.
With respect to Europe .
It's a more complex restructuring market as you know because of the different different jurisdictions, but the stress level is higher in Europe , and the restructuring opportunity is significant in Europe .
And so as a result, both in the U S and Europe , we're seeing an increase in conversations we're seeing an increase in pitches and we're seeing an increase in engagement letters.
And that's really fueled by our footprint, which is really much broader than it was last time.
That the macro economy was in a position that it is today.
Great color, thanks for taking my questions.
Thank you.
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.
Thank you operator, thanks, everybody for joining today and we look forward to reconnecting as a group.
With our year end results.
Thank you. This concludes the Perella Weinberg partners third quarter 2022 earnings call and webcast. You may disconnect. Your line at any time and have a wonderful day.
Goodbye.
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