Q4 2022 Perella Weinberg Partners Earnings Call

Speaker 2: community.

Speaker 3: This conference is being recorded.

Speaker 4: At this time, I'd like to turn the conference over to Taylor Reinhardt, head of investor relations. Please go ahead.

Speaker 5: Thank you, operator, and welcome to our full year and fourth quarter 2022 earnings call. Joining me today are Peter Weinberg, Founding Partner and Chairman Andrew Bednar, Chief Executive Officer, and Gary Bransick, Chief Financial Officer.

Speaker 6: A reply of this call will be available through the Investors page on the company's website, approximately two hours following the conclusion of this live broadcast through February 16, 2023.

Speaker 7: For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 9, 2023, and have not been updated subsequent to the initial earnings call.

Speaker 8: Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP's expectations of future financial and business performance and conditions in industry outlook. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions that could cause actual results to differ materially.

Speaker 9: from those discussed in the forward-looking statements and are not guarantees of future events or performance.

Speaker 10: Please refer to PWP's most recent SEC filings for discussion of certain of these risks and uncertainties.

Speaker 11: The forward-looking statements are based on our current beliefs and expectations, and the firm undertakes no obligation to update any forward-looking statements.

Speaker 12: 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.

Speaker 13: CWP has reconciled these items to the most comparable GAAP measures in the press release files of today's Form 8K, which can be found on the company's website. I will now turn the call over to Peter Weiberg to discuss our results.

Speaker 14: Thank you, Taylor. Good morning, everybody, and thank you all for joining us on our earnings call. I will take a few moments to review our 2022 results and accomplishments and then turn the call over to Andrew and Gary to discuss outlook and financials respectively.

Speaker 15: Before I start though, I just wanted to acknowledge that we lost one of our colleagues who prematurely passed away very recently. He was a friend and a member of the PWP family, and I wanted to take a moment to acknowledge his passing and reiterate our deepest condolences to his family. Thank you.

Speaker 16: So this morning we reported full year revenues of $632 million, adjusted pre-tax income of $98 million, and adjusted EPS of 78 cents a share.

Speaker 17: Our top-line results, while down 21% versus the prior year's record performance, are strong in the context of the tumultuous environment of 2022, an achievement which speaks to the tenacity of our team and the commitment of our clients within a challenged market backdrop.

Speaker 18: Within our traditional M&A business and in line with market trends, we experienced a broad-based contraction in activity levels across industries.

Speaker 19: That said, industrials, financial technology, and healthcare represent positive performers.

Speaker 20: While European M&A faced many headwinds this year, the completion of a few large deals on our platform supported stable absolute revenue contribution from this geography year over year.

Speaker 21: Fees attributed to our financing and capital solutions business, which includes global restructuring, capital markets advisory, and private capital placement were up in 2022.

Speaker 22: A trend we hope to see continue as we further invest in this business and diversify the scope of our client solutions. Andrew will speak more of the importance of this growth opportunity shortly.

Speaker 23: To me, as both the founder and shareholder, the value of our franchise is measured by more than just financial metrics, and I would like to quickly touch on a few of these items which defined our success during the year.

Speaker 24: In 2022, we were a trusted advisor on the largest bankruptcy, the largest completed take-private, the largest public debt restructuring in US history, and several complex spin-offs.

Speaker 25: We were involved in some of the most significant M&A transactions both in the US and Europe and solidified our position as a preeminent ESG advisor, an area of focus for our clients across industries and geographies.

Speaker 26: These high-profile deals are not only great for our brand, they also showcase our commitment to broadening our product suite and moving our capabilities and competence beyond traditional advisory.

Speaker 27: We continued to invest in top-notch senior talent and cultivate talent from within.

Speaker 28: As of December 31, 2022, we had 64 partners and 47 managing directors in our advisory business.

Speaker 29: These figures include eight partners and 14 managing directors who were added to the platform in 2022 both as lateral hires and internal promotes.

Speaker 30: Through external hiring, we have broadened our product sector and geographic reach and have begun realizing synergies across the business.

Speaker 31: The future productivity potential from these newly made partners and MDs alone is tremendous.

Speaker 32: And finally, we acted on our commitment to return capital in total returning north of $100 million in 2022.

After announcing $100 million share repurchase authorization in February of 2022, we have deployed approximately 75% of it.

in under a year's time, and we announced this morning an incremental $100 million authorization.

Our new authorization reflects our continued commitment to our capital return objectives.

We have also paid out a consistent quarterly dividend of $0.7 a share and further mitigated the annett settlement of vesting employee RSUs.

While this is my last earnings call, I will remain very involved in the firm as Chairman of the Board of Directors and as an active partner. Andrew has my full support and I strongly believe PWPs best days lie ahead. On that note, Andrew, I will turn it over to you. Great, and thank you, Peter.

narrative from us and our peers was largely aligned.

We are in a more challenging operating environment.

Client dialogue remains active and gross backlogs are full, but there is significant elongation and increased risk with intersection completion timelines.

Over the past few months, we have started to see a subtle yet important shift in client behavior and in confidence levels.

As we have alluded to before, when markets gain some clarity as is happening real time on rates and inflation, parties explore transactions and pursuit of their strategic priorities.

To be sure the market is still turbulent, financing is more difficult, and comes at a higher cost than we have all become accustomed to.

and transactions still need to get from announcement to close.

But it does feel like the range of uncertainty has narrowed.

And that is a step in the right direction.

Looking beyond this quarter, let me speak to our strategy. Our singular focus is and will continue to be providing financial and strategic solutions to our clients across our platform.

especially in connection with their most complex financial and strategic challenges.

Our focus is on scaling the franchises we've already built, so we can broadly serve the needs of our current clients while also expanding our clients footprint.

Senior external hires who can broaden our industry and product expertise will be the key to above market growth as will top performers who rise through our ranks internally.

Our advisory partner at MD account today of 65 and 51 respectively reflects the 2023 elevation of a number of individuals who embody PWP values of trust, integrity and teamwork who are well respected by the colleagues and clients.

and who will contribute to our top line going forward.

Expanding and optimizing our financing and capital solutions business was a priority in 2022 and will continue to be a focus in 2023. As the complexity of capital markets has increased, so too has the demand for independent advice around financing and capital structure.

both in the context of M&A transactions as well as standalone. We made several important hires in this area and their close collaboration with industry sector bankers will ensure that we are leveraging the combined expertise of our teams to provide the best advice to our clients.

As we further scale our platform and expand our co- and footprint and our capabilities, our revenue streams become larger and more diversified, allowing us to realize operating leverage and grow earnings.

I have discussed with our team internally the importance of goal setting, continuous improvement and delivering for our stakeholders from clients to shareholders.

As we continue to execute against our strategic priorities, we have set a first financial objective of achieving annual revenues in excess of $1 billion.

At a billion dollars in revenue, we can more efficiently leverage our infrastructure to drive profitability and create shareholder value, as well as attractively compensate our team for their performance and enhance our ability to invest in new talent.

Each of our senior bankers has an individual performance metric, but now all of us have a firm-wide revenue objective as well.

Gary, I will now turn the call over to you to discuss our results in more detail.

Thank you Andrew. As it pertains to our fourth quarter revenue, the surprise to the upside versus our previous expectation can be attributed to some seasonality experienced across the firm as well as the timing of a few large fee events and once again demonstrates how difficult it can be to predict a quarter's performance in our business.

We do not expect our first quarter results to benefit from seasonality as our fourth quarter did.

As a reminder, 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 GAP to adjusted results can be found in our earnings press release, which is on our website.

On the expense side, our adjusted compensation margin of 66.7% for 2022 is above where we accrued during the first nine months of the year.

As I discussed on our third quarter earnings call, in setting our compensation margin for the fourth quarter and the year, we carefully consider the business performance, market environment, and the compensation levels needed to attract and retain key talent and decided a modest increase, but still within our medium-term guidance of mid-60s was prudent for the full year of 2022.

We view this investment in our team and our platform as the most important type of CapEx decision we can make in a talent-driven business, and one which should further our long-term value creation.

As a result of setting our full year compensation margin at 66.7%, together with our third quarter year-to-date accruals at 64%, our effective fourth quarter ratio was 73.2%.

Our adjusted non-compensation expense was $123 million for the full year 2022.

flat year-over-year, and 32 million dollars for the fourth quarter, down 9% from the same period last year.

Our full year non-com spend came in lower than expectations provided on the third quarter earnings call and well below our expectations at the beginning of 2022.

Specifically, our fourth quarter expense

benefited from lower legal, recruiting, and other professional fees than we had forecast.

Throughout 2022, we were able to realize cost savings and reduced legal consulting and D&O insurance spend as our tenure as a public company grew, and lower rent and DNA expense as our headquarter locations reached the end of their initial lease terms.

As it pertains to 2023, we expect an increase in non-cop spending of approximately 15 to 20 percent over this past year due to an anticipated overlapping of gap rent in New York, a step up in depreciation expense related to our new headquarters.

increase in legal expenses and technology related investments.

Some assumed continued increase in travel and related spend.

continued investment in talent, and inflationary pressures.

That said, and as 2022 demonstrated, we continue to look for opportunities to realize cost savings, especially in more challenging operating environments.

Let me briefly provide an update on our London and New York Headquarters projects.

We moved into our new London headquarters this past Monday, and 2023 rent expense related to that office will approximate our go forward run rate.

Our New York headquarters renovation is underway and we expect it to be completed by the fourth quarter.

We should have approximately three-quarters of overlapping rent in our swing space as we renovate.

In both locations, we have free rent periods which mitigate the cost of overlapping rent and build-out costs.

As mentioned previously, both leases were secured on attractive terms, increasing our overall square footage in those offices by approximately 20%, with no increase in 2023 or 2024 rent expense versus 2021.

The new construction work will drive a material increase in the depreciation expense component of our non-copic expense in 2023 and beyond.

We reported adjusted operating income of $87 million for 2022 and $17 million for the fourth quarter.

Adjusted operating margins were 13.8% and 9.2% respectively.

Our adjusted non-operating income of approximately $11 million for the full year included nearly $7 million in net gains related to effects, revaluation, and realizations.

During the fourth quarter, the relative weakening of the US dollar translated into unrealized FX losses for our quarterly pin-out and reversed some of the net FX gains earlier in the year.

As noted in prior quarters, we believe the majority of the net FX games reported in 2022 have no economic substance to our business as they are the result of the revaluation of US dollar denominated cash and intercompting receivables and payables held by our foreign subsidiaries.

Just the net income totaled $82 million for 2022 and $12 million for the fourth quarter.

Our adjusted if converted net income was $70 million and $10 million, respectively, and presents our results as if all partnership units had converted to shares of common stock.

adjusted, diluted, if converted net income per class I share, was 78 cents for the full year, and 11 cents for the three months and December 31, 2022.

For the year-to-date period, our adjusted as if converted tax rate was approximately 28% relatively in line with our expectation at September 30th.

Turning to capital management, in 2022, we returned $104 million through the repurchase of approximately 9.5 million shares in the open market, the net settlement of more than 1 million shares to satisfy tax obligations in lieu of share issuances, and the payment of $25.7 million.

in pro-rata distributions to limited partners, which allowed PWP to pay dividends of $12.8 million to its class A shareholders.

Year-to-date 2023, we've remained active in the open market and have deployed an additional $5 million in share repurchases.

The board has declared quarterly dividend of $0.7 per share, payable on March 10, 2023, to holders of record as of February 28, 2023.

As of December 31st, 2022, we held $312 million of cash, cash equivalents, and short-term investments in U.S. Treasury securities. We had no debt and had an undrawn, revolving credit facility.

With that, we'll now turn the call back to the operator to open the line for questions.

Thank you, sir.

At this time, if you wish to ask a question, please press star 1 on your telephone keypad.

You may remove yourself from the queue by pressing star 2.

We'll take our first question from Devon Ryan with JMP Securities. Your line is open.

Good morning Peter, Andrew, and Gary. Thanks for taking the questions.

Morning, high- egoism.

I guess maybe just want to start on the current operating environment. You guys were, I think, early last year to point out some of the turn in sentiment. And appreciate that the environment remains uncertain, but good to hear about maybe some of the recent improvement that you're seeing in sentiment. So...

Be great to maybe just add a little bit more context on how that's evolving, whether geographically Europe versus US, activity, corporates versus sponsors. I'm just trying to get sensitive. That's kind of a blanket comment of what you're seeing. Maybe it's some of the maybe the recent green shoots or are there some different themes that are emerging amongst either.

geographies or product types or client types. Thanks. Yep, sure, Devin. I think last year, as I mentioned in the comments up front, there was a very consistent alignment with our peers and that there's a relatively unconstructive macro backdrop for

I think that in the first few weeks of 23, I'd say the macro backdrop has improved. It's less unconstructive, but I wouldn't say that it's incredibly positive. Sort of going into 23, we still have a lot of headwinds that

that we in the peer group will grapple with. I think financing markets are opening, but they're not open. And so you do have windows of open credit. You've had a bit of rallying here in the first couple of weeks, but it's very, very different from the 2021 backdrop where you had wide open credit markets, not only in availability and size, but also at various.

have had such a rapid change in the rate environment. You have typically buyers resetting on valuation faster than sellers. And so that is a very natural disruption. I think that will change. PE will have to deploy capital. That's their job. And I do think it will come back.

with respect to corporates as an interesting environment that we see because they're seeing less sponsors competing for assets that have been on their wish list for many years and find themselves flush with cash and decent valuations. And so from a corporate buyer perspective it's actually quite attractive environment.

the plumbing that's been backed up in that market unclog. And then lastly, you had a question I think about just the European, the rest of the world versus US. Not really seeing a big difference in activity there. It's pretty balanced in terms of our historic contributions from both Europe and the US.

I do think, as I said in my upfront comments, the range of uncertainty of outcomes has narrowed. With respect to rates, we're on the back half of these rate increases, it seems. And with respect to Europe , I think the worst case scenarios that were outlined, post the invasion of Ukraine have really turned out to be...

significantly better than again those worst case scenarios which takes away a lot of uncertainty.

Okay, great color there. Thank you. Just as a follow up, Andrew, on the billion dollar revenue goal, I just want to get a little more context there. What are some of the profitability metrics potentially look like at that level of revenue? I appreciate, you know, you'll have more to pay, et cetera, but like how should we think about

maybe what the comp ratio trend could look like. And then also would you need a meaningfully larger infrastructure to get there, which would imply a meaningfully higher non-cop cost. Just trying to think about kind of what that billion dollars means for actually profitability. Thanks.

Yep, sure. So I don't think our long-term comp margin target of mid-60s, which we've outlined historically both in our original IPO process and then with you all on our quarterly calls changes as we move through that initial revenue target. I think what does...

Drive bottom line earnings is that we have enormous operating leverage in non-comp. And so I don't see a material increase in non-comp required for us to achieve a consistent billion dollar plus revenue target.

All right, great. I'll leave it there, hop back into Qubit. Thanks very much.

Next time.

Thank you. Our next question will come from James Yorrow with Goldman Sachs. Your line is open.

Good morning. I just wanted to touch on the restructuring backdrop that you're seeing at this point. You talked about financing markets opening but not being fully open. Has this impacted restructuring and do you think it's a risk to that restructuring backdrop if markets fully reopen?

Yeah, thanks for the question, James. We have seen a very significant increase in our overall capital solutions and financing business. So within our financing and capital solutions business, that includes restructuring, liability management, debt advisory, and private capital markets business.

that generally has picked up quite significantly through the course of fourth quarter and continues in Q1. I think credit markets are going to remain volatile, as I mentioned up front. There are windows that are opening and closing. We don't have a consistently open market.

We also have realized within our corporate client base, we have a number of finance executives and CFOs that have really not seen this type of market. And in fact, many of us haven't with such a rapid rise in rates and so much of the market hanging on to every fed word.

And so that's a challenge of where executives that need to think about their financing are seeing a market where they need some help in guidance and our teams are providing that guidance and we're able to be involved in transactions where it's not just, you know, call 911, I have a potential bankruptcy.

but extends much further beyond that to perfectly healthy companies that need assistance in accessing the markets and managing maturities.

That's very clear. I just wanted to touch on the capital return priorities from here. You did increase the share repurchase authorization this quarter by I think 100 million. So when you just think about the cadence of capital return, should we expect buybacks to operate there to be at sort of this 4k22 level or could they increase or decrease from here? And then if...

What we've kind of said in the past and is really true is we do look at a number of factors. You saw, if you looked at last year, for example, if you saw the cadence from the time the announcement, it was heaviest in the second quarter, which is when our stock price was kind of at a much lower place. So obviously, you know, that is one factor. You know, we look at our overall.

cash needs, cash balances, other needs for investment. And we're mindful of the liquidity in our stock as well. We want to make sure that we have sufficient liquidity that we can attract new investors into the name. So those are all things that we think about when we consider the cadence of it.

In terms of cash balances, again, we haven't provided an explicit target on what that minimum is. You can kind of look at, if you look at historically quarter by quarter where we've been, and you look at cash net of accrued comp liability, which is the biggest seasonal factor that we have.

You know, you can kind of get some sense of where that number has hovered around it. At year end, for example, we had $312 million of cash, cash equivalents and marketable securities. And net of those accrued comp liability, the number was about 100 million at that time. And so obviously we have worked in the capital needs we have.

You know, want to keep some dry powder for just both changes in the market condition, opportunities and so forth, but you know, that's that's kind of where we end of the year.

Okay, thank you both for taking my questions.

Thanks. Thank you.

Thank you. Our next question will come from Stephen Shubak with Wolf Research. Your line is open.

Hey, good morning.

So, Andrew, I was hoping that you might provide as a follow up to Devin's earlier question, just some additional color on some of the assumptions underpinning that 1Billion dollar revenue target. It didn't sound like you provided any explicit timetable for when you could get there.

was hoping you could just speak to your expectation around industry fee-pool growth.

that would support that target and your partner growth and productivity per partner. Just trying to get a census to the same store versus new store dynamics that are underpinning that target.

Yes, sure. So as I mentioned, it's not a time-based target. It is something that we are working on and usually when we set an objective, it's post-taste around here. So our expectation and hope is that we drive to those targets as quickly as possible. We have not set a specific time requirement against it. I think it's just important as we evolve from...

private partnerships now public enterprise and we have a broad group of stakeholders even though the partnership and employees own 51% of the firm it's important to have these cuts and metrics for our public stakeholders. So that was a key reason why we wanted to set that objective. I think in terms of how we get there.

We will continue to drive partner productivity, but also our MD productivity, which has been significantly improving over the years as we've made select hires. And we've also, I think, done a better job at developing our non-partner talent.

We also have six major industry groups, and if you think about contribution from each of those groups at 150 million plus, we can see getting to our billion dollar target. And with respect to adding additional client coverage, as I said up front, our...

Our plan on hiring is about increasing our client footprint. We view ourselves as a small firm with a big brand, and we have a tremendous opportunity to acquire talent and add talent to our platform that does business consistent with our values and can help us drive our business and achieve those revenue metrics.

context of the original SPAC presentation that you provided. It had three year management forecasts and interestingly the 2022 revenue bogey that you outlined at that time. I maybe it wasn't a guide or objective but at least an indication as to what that revenue trajectory might look like was actually similar to what materialized.

have limited your ability to manage both the comps and based on the outlook you just provided some of the non-coms a bit better versus what was contemplated in some of those original So it was hoping for some additional context there.

Yeah, Steve, I guess one just one point to clarify at the time. This is late 2020 when we were prior to the DSPAC transaction, we were providing some estimates of forward projections. We were very clear that our comp ratio target for the midterm was mid 60s.

And we had to pick point estimates just to illustrate something in the projections. And that was kind of the best view that we had at the time. So we're today in a market environment that we can actually see what environment we're in today. We know where we are in partners, how many new partners are on the platform and where they are. We know what competitive environment it's like. And we know what competitive environment it's like.

is going to reflect the environment and kind of where we see things. And obviously, when we report our first quarter results, we'll need to put a stake in the ground on our best view at the time on where we'll be accruing for the full year. We don't have that today, but obviously we will on our next earnings call.

A helpful caller, Gary. Thanks so much for taking my questions.

Thank you. Thank you. Our next question will come from Matt Moon with KBW. Your line is open.

Good morning guys.

what at morning

So just one for me, just thinking about the backdrop of the environment. Obviously there's a lower number of deal activity making across the finish line. And you've also spent a lot of this past year. So cleaning up the capital structure and having that behind you. So just kind of curious from here how we should be thinking about your willingness to grow potentially inorganically.

and I'll speak to the inorganic growth. So we have almost a third of our partnership is on the platform less than three years. And so we think that represents significant embedded growth within the firm today. And this is an area where we invest in, it's part of the reason we took up our Comprehitio because we need to invest behind our teams and that's our CAPEX. And we...

industries where it's adjacent to our core six industry groups. We will continue to add talent that increases our client footprint. We'll also selectively hire in areas that enhance our product capabilities and that's both here in the US as well as in Europe .

Okay, great. And then one for Gary, just I appreciate the non-comp growth guidance expressed for 23. I know a lot of that is baked in just given the duplicative rent expense and the higher DNA on the build outs. But just kind of curious what

kind of operating environment and revenue backdrop we should be considering that's kind of underlying that 15 to 20% year in your growth guidance.

wondering on what environment in particular we're looking at for that assumption.

You know, I think what we are really assuming in that is that, you know, we're not assuming a dramatic change in the operating environment, but we are assuming, you know, that this is a very attractive business to be in over the long term, and we're continuing to invest in the business with that in mind.

So while we've certainly tried to moderate some of our non-config expenses for things that will not impact growth in the business, we actually are still continuing to invest in things that support our people in some areas of technology and some of that is driven there. Some of it is inflation.

And some of it is just headcount growth, which has been reasonably significant as we've invested in our business here over the last few years.

of it is just headcount growth, which has been reasonably significant as we've invested in our business here over the last few years. OK, great. Thanks, guys.

Thank you. This concludes the Q&A portion of today's call. I would now like to turn the call back over to Andrew Bednar for any additional or closing Thank you, operator. And thank you all for joining. I also just wanted to recognize the...

tremendous performance of our team, all of our partners, all the rest of our teammates that have worked extremely hard during a very challenging operating environment and continues to deliver for our clients and for all of our stakeholders. So thank you and we'll talk to you on our next call.

Ladies and gentlemen, this concludes the Parela Weinberg Partners full year and fourth quarter 2022 earnings call and webcast.

You may disconnect your line at this time and have a wonderful day.

and have a wonderful day.

Goodbye.

Thanks for reading!