Q1 2023 Piper Sandler Companies Earnings Call
Good morning, and welcome to the Piper Sandler companies conference call to discuss the financial results for the first quarter of 2020 three.
During the question and answer session Securities industry professionals may ask questions of management.
The company will make forward looking statements on this call that are not historical or current facts, including statements about beliefs and expectations and involve inherent risks and uncertainties.
Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the S. E C, which are available on the company's website at Www Dot Piper Sandler Dot com and on the S. E C website at Www.
Scott S E C dot Gov.
This call will also include statements regarding certain non-GAAP financial measures.
Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure.
The earnings release is available on the Investor Relations page of the company's website and at the S. E C website.
As a reminder, this call is being recorded.
Now I'd like to turn the call over to Mr. Chad Abraham Mr. Abraham you may begin your call.
Good morning, everyone. Thanks for joining us it's great to be with you to talk about our first quarter results I'm.
I am here with Deb Schoneman, our president Jim Carter, our CFO .
Despite volatility during the first quarter of 2023, our diversified platform generated adjusted net revenues of $289 million.
14, 1% operating margin and adjusted EPS of $2 35.
Persistent inflation rapid central bank rate increases and stress on the banking system led to a lack of confidence that continues to reduce overall market activity.
Although volatility benefits, our equity brokerage business it adversely impacts our other businesses, which rely on constructive market conditions and a more stable outlook.
The bank turmoil has further extended uncertainty and reduced confidence levels delaying the inflection point to better market conditions.
Turning to corporate investment banking.
We generated total corporate investment banking revenues of $167 million during the first quarter of 2023.
From the first quarter of last year, driven by lower advisory revenue.
That said, we continue to diversify our platform across sectors products and clients scaling our industry groups and adding new capabilities enhances our ability to deliver strong results against mixed economic conditions.
Specific to advisory services revenues of $141 million for the quarter decreased year over year reflective of the continuing challenges in the M&A and debt markets.
Despite this we completed 69 advisory transactions during the quarter and maintained our position as the number two advisor on announced U S M&A transactions under $1 billion.
Sector performance was led by our financial services and healthcare groups with solid contributions from our energy and power and consumer teams.
In addition, following a record year in 2022, our restructuring group started this year strong with record quarterly revenues.
The quality of this team combined with our market leading industry groups is driving strong collaboration and positioned us to win two high profile restructuring assignments.
During the first quarter, we advised the FDIC on the sale of substantially all of the deposits and loans of both Silicon Valley Bank and signature bank.
These advisory assignments demonstrate our market, leading restructuring capabilities and financial services expertise.
The near term outlook for M&A remains soft driven by economic uncertainty and difficult debt financing conditions, which continue to impact deal timelines and the conversion of our pipeline.
We remain cautiously optimistic towards the second half of 2023, but that will depend on sustained market improvements.
Turning to corporate financing.
Although our equity financings increase from a year ago overall market activity remains below historic levels.
Commercial banking concerns increased volatility, resulting in a pause in equity financings late in the quarter.
We generated $27 million of financing revenues during the first quarter of 2023 up year over year.
We completed 23 equity debt and preferred financings raising over $4 billion for corporate clients.
Activity for US was concentrated in the health care sector with additional contributions from financial services and energy and power.
Equity capital markets had been largely shut down for over five quarters along period by historical standards.
As we look ahead, we expect financing activities to build as we progressed through 2023.
Turning to investment banking managing director head count.
We remain focused on building out our sub sector coverage, we added 13 M DS, finishing the quarter at 171, managing directors the most in our history.
Development of our own talent continues to be a priority in 2023 was a large promote class, adding 10, new managing directors across our industry and product teams.
We also hired three managing directors to our platform during the quarter broadening our coverage in health care services asset and wealth management and real estate.
Adding new MD talent is critical to our strategic goals and key to driving incremental revenues over time.
We continue to increase the earnings power of our franchise and we see significant opportunity to grow our market share further over the long term.
We remain focused on helping our clients navigate a highly dynamic economic landscape.
When markets stabilize we expect activity levels to accelerate from both sponsor and strategic clients and.
And we believe that we are uniquely positioned to advise our clients to meet their objectives.
We remain focused on our strategic goals.
Kaling, our industry groups consistently expanding market reach and share over time, increasing transaction fee size, and adding Mds and competencies.
With that I will turn the call over to Deb to discuss our public finance and brokerage businesses.
Thanks, Chad.
During the first quarter of 2023, our public finance business generated $17 million of municipal financing revenues down year over year.
With higher nominal rate increased interest rate volatility and weak investor demand municipal issuance has declined significantly across the industry.
Market issuance during the quarter was approximately 75 billion down roughly 25% from a year ago and represented one of the slowest quarters in the last decade.
High yield new issuance volume declined even more by approximately 57% relative to the first quarter of last year.
This negatively impacted our relative performance as a meaningful component of our public finance business is in high yield specialty sectors.
As we look ahead, our pipeline is large and diverse but we believe a period of sustained municipal fund inflows and interest rate stability is needed for issuance to increase from current levels.
Our equity brokerage business was a bright spot as it generated quarterly revenues of $54 million up from the first quarter of last year.
Equity markets are elevated volatility during March however, overall volatility and volumes for the first quarter of 2023 were lower year over year.
<unk> share gains and the addition of cornerstone macro drove our strong relative performance.
We traded $2 8 billion shares during the quarter on behalf of our clients as they reposition portfolios inside our premier trade execution capabilities.
In periods of heightened volatility clients consistently trust, our brand and broad trading expertise to execute quickly and efficiently.
With client research votes, continuing to increase and our ability to further cross sell products to clients, we see opportunity for continued market share gains in this business over time, which should help mitigate a declining fee pool and less volatility.
Moving to fixed income for the first quarter of 2023, we generated revenues of $42 million down compared to the first quarter of last year.
Market conditions in fixed income were challenging during the quarter with large interest rate swings.
Uncertainty on the direction of interest rates largely kept most clients on the sidelines.
Trading among our depository clients was particularly slow as banks focused on building liquidity and continue to evaluate their capital and funding position.
Activity among our municipal center clients was also subdued as municipal bonds remain expensive on a relative basis compared to treasury driven by the lack of new supply.
The breadth of our client relationships and product capabilities provided some level of resiliency to our results.
Insurance companies and public entity clients were active as they felt relative value in the short end of the yield curve.
Advising clients on hedging strategies drove an increase in derivative activity.
However, we expect the near term outlet to remain challenging.
Like our investment banking group, we remain focused on broadening our fixed income platform and during the quarter, we hired five talented and seasoned professionals to help build out our trading and distribution capabilities, primarily in non agency structured credit.
Our recruiting pipeline is robust and we see opportunities to continue expanding our market reach now I will turn the call over to Tim to review, our financial results and provide an update on capital use.
Thanks Deb as a reminder, my comments will be focused on our adjusted non-GAAP financial results, which should be considered in addition to and not a substitute for the corresponding GAAP financial measures.
We generated net revenues of $289 million for the first quarter of 2023 down 26% from the fourth quarter of 2022, and 20% from the first quarter of last year.
Market conditions remain uncertain and have largely kept our investment banking and fixed income clients on the sidelines.
Equity brokerage continues to be a highlight generating their second strongest quarterly revenues on record.
Despite tough conditions, we generated solid results and continue to manage the business to reflect current market conditions.
Turning to operating expenses and margin.
Our compensation ratio for the first quarter of 2023 was 63, 3% slightly elevated for both the fourth and first quarters of last year driven by lower net revenues.
We continue to maintain our philosophy of managing compensation levels to be a balance of employee retention investment opportunities and operating margins.
Based on our current outlook, we expect our compensation ratio to be around Q1 levels, but will be dependent on recruiting opportunities which could accelerate.
Non compensation expenses for the first quarter of 2023, excluding reimburse deal expenses were 59 million slightly below our expectations as we focus on managing our costs and benefited from the timing of certain expenses.
Non compensation costs, excluding reimburse deal expenses increased 8% compared to the first quarter of last year, primarily because of the additions of cornerstone macro Stanford and DBO to our platform.
Looking ahead, we expect our non compensation costs, excluding reimbursed deal expenses to be closer to our previously provided guidance of around $62 million per quarter.
During the first quarter of 2023, we generated adjusted operating income of $41 million and an operating margin of 14, 1% demonstrating the resiliency of our diversified platform.
For the current quarter adjusted income tax expense was reduced by $14 million of tax benefits related to restricted stock vesting, which resulted in a net adjusted income tax benefit for the quarter.
Excluding these benefits our first quarter adjusted tax rate was 28%.
We continue to expect our full year 2023, adjusted tax rate will be within a range of 27% to 29% excluding the impact from stock lessons.
During the first quarter of 2023, we generated net income of 42 million and diluted EPS of $2 35.
We've made great strides over the last few years to increase the long term earnings power of our platform.
Although our results this quarter reflect the challenging market conditions. We believe we are in a position of strength once markets open up to continue to realize the benefits of our expanded and more diversified business.
Let me finish with an update on capital allocation.
During the first quarter of 2023, we've returned an aggregate of $112 million to shareholders through buybacks and dividends paid.
We repurchased approximately 426000 shares of our common stock were <unk> $61 million.
Which more than offset the share count dilution from this year's annual stock grants.
We also paid an aggregate of $51 million or $1 85 per share to our shareholders through our quarterly and special dividends.
In addition today the board approved a quarterly cash dividend of <unk> 60 per share to be paid on June nine to shareholders of record as of the close of business on May 26.
With that we'll open up the call for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will take our first question from Devin Ryan with JMP Securities. Please go ahead.
Thanks, and good morning, everyone.
Hey, Devin.
Okay.
Just start on the.
M&A advisory business I appreciate we're in a pretty uncertain moment here in the market, but let me just give a little more color around.
Just just the pipeline or maybe the pipeline of mandates.
To get a sense of like where dialogue or today I appreciate you've got some moving slowly but just how active dialogues are maybe more mandates are relative to year ago.
And then also on the sponsor side of the business. What you think could trigger point would be to kind of maybe.
Speed things back up again.
Yes.
Be asleep.
Q1 advisory number was was <unk>.
Slower than Q4 and the quarters.
Last year some of that had to do with just how much stuff we started in <unk>.
Q3, and Q4 of last year, which was a.
A smaller number what I would say and then even the stuff that was contemplating started you ran into quite a bit of volatility in the back half of <unk>.
March with with things going on with the banks.
Not that it's a long period of time, but I would say.
In April we've definitely been more active launching transactions now it's early in that cycle to know.
Are you going to meet sort of expectations on price are you going to get all of the financing right, but certainly encouraged by the pace of.
New launches and some of the feedback on some of the deals that were taken the sponsors at least so far although.
Knowledge that Thats early.
Okay got it maybe I'll dig in a little bit more on the.
The bank side, and just financials more broadly in the Waco covered recent banking stress. So are you seeing this play out.
In terms of kind of capital raising demand or maybe kind of a building pipeline of capital raising that you might need to happen.
Sure.
I'm, assuming your M&A still but that's going to be challenged in the bank space, but.
Yeah, just maybe other types of strategic advice thats going to be needed here in the intermediate term to navigate through what's still pretty uncertain moment for the industry.
Yes, I would say we're stuck in this phase, where we're a little bit frozen I mean, obviously people sort of are seeing it a lot to the banks.
Ah report and it's been tougher quarters I definitely think.
Longer term this is going to spur more advisory activity, but that's going to take some time to start and then obviously, we all know that regulatory environment. It takes.
Time to close I think it's.
We certainly expect more capital raising but I think we're going to need a little more guidance to see what shakes out regulatory here, what sort of expected what.
Other peers are doing so I would say in general we view this turmoil as going to be.
Quite good long term for our depository business, but it's going to take a little bit of time.
It's not going to make a big impact in the next quarter or two.
Got it Okay. That's helpful and then I'll just close out here on the restructuring business had another nice higher velazco days there.
You've been building out that team and capability and it sounds like you've had some momentum there. So maybe just if possible kind of size scale, where you are in that business. Today, and then also the opportunity to add how much appetite there is to grow that.
The white space, you see just particularly as we're getting into a little bit of a restructuring cycle, but could be an extended moment if interest rates.
Stay higher here for the next couple of years.
Yes. So just just a reminder, we really got into the we had a very small team we got into the restructuring business.
End of 'twenty 2020, with Trs, we've absolutely grow on that team and pretty much growing revenues, but off of a small base for us I would say, we're starting to see an inflection point in some transactions and the size of it.
To grow we absolutely expect it'll be another.
And a record for us in that business this year, but it's still off of a small base where were starting.
Starting to impact the total advisory line, but but it's going to take US a couple more years of scale really happy with the hires we've made but we're certainly starting to see where that's going to make a overall impact on our advisory line.
Got it okay, great I will hop back in the queue I got a couple more but let other people ask.
Great. Thanks.
And we'll take the next question from James <unk> with Goldman Sachs. Please go ahead.
Good morning, and thanks for taking my questions.
Maybe if we could just start with the hiring backdrop that you are seeing a number of your peers have talked about this being much stronger backdrop.
On the recruitment side.
This could impact their comp ratios from here.
Higher comp ratio that you put up this quarter already discount better a better hiring backdrop and what do you see as the opportunity to expand that business from here.
Yes.
I would I would certainly agree and the last.
Couple of months in particular, I've certainly seen <unk>.
<unk> opportunities for more of our industry teams more of our product groups, we've been fairly consistent.
And hiring in <unk> and even in the last few tougher quarters have added to that head count you can see our MD head count, but I would say, yes, we're even at another.
Inflexion point here this spring with the number of dialogues and things going on I would say.
We're pretty careful when we look at the comp rate on a quarterly basis to think about where we're going with hiring.
Could the comp break go I think if the cap rate goes higher from here it will be marginally and it will be based on do we accelerate some of the hiring even further so.
I would agree we're seeing more opportunity, we won't be afraid to take the comp rate.
A bit higher but on a relative basis relative to some of the other comments and things you've heard from peers.
Okay, that's very helpful.
Maybe just turn to fixed income I think the results there were impacted by market volatility, which I would imagine is in part to do with the recent banking stress, maybe just speak to whether client engagement has improved so far in the second quarter or if not what do you think the timing will be for for this part of the business to inflect.
<unk>.
Yes, James I mean, if you think about the end of 2022, we started seeing this happening particular with the banks and credit unions of their liquidity.
It is not as strong and thats been only.
That issue has been increasing now so.
Banks in particular.
We have seen a reduction in activity, however, conversations with those banks just around helping them with asset liability management, and helping them hedge interest rate risk with our derivative strategies has been there.
Issue as if they're if they don't have the liquidity and arts app.
<unk> in the market there is not much we can do about that now we are not seeing that pickup yet in the second quarter. It's one of those things where we need to see.
And just the volatility of rates I would say primarily.
And it can turn quickly but.
I guess, it's not something that I can predict when when that will happen.
Related to the rest of our client verticals, we saw some help.
<unk> from the diversification of things like public entities and insurance companies that took advantage of maybe the shorter end of the curve and some trading strategies, but there are two overall, we're seeing clients really taking a pause as they try to understand where rates are going and at what point do they actually want to go out on the curve from a duration perspective.
Okay. That's very helpful. Thank you for taking my questions.
Thank you.
And we'll take the next question from Stephen <unk> with Wolfe Research. Please go ahead.
Good morning, This is Brandon O'brien filling in for Stephen So.
So I guess to start on the advisory side, we have heard from you in and number of your peers talk about a few different conditions that are needed for an M&A recovery, including the narrowing of bid ask spreads greater macro clarity more financing available availability wanted to get a mark to market on these various factors at the moment relative to where are we.
Last quarter, and how you see that evolving from here.
Yes, I would say.
Probably top on the list is just.
The macro environment.
Sure.
Especially on the strategic side of the business you know I always look for CEO confidence and people have to feel good about their own next couple of quarters before theyre going to transact and I don't really think we've.
Seeing a reflection point, there so you're definitely going to need for a lot of pick up to see some macro improvement.
I think relative to the financing environment.
I do think we see green shoots and we can kind of see that from our debt advisory business.
And it kind of depends on the part of the market you're in.
At least in the middle market.
And some of the smaller transactions.
Relative to sponsors they might write a bigger equity check and if maybe they were getting six times leverage.
Maybe they're getting five times and so I would say that market is not frozen. It is open it's just tougher based on sort of a lower leverage ratio higher.
Higher amount you're paying it's just higher it's harder to transact, but its certainly open and on lots of our deals.
At least in the middle market, we do see a path to financing and then I can't remember what your third part was.
Okay.
Brendan.
Bid ask spreads values.
Evaluation.
Yes, I would say.
Valuation bid ask spreads.
That always takes a few quarters, but were at least three or four quarters into that so that's probably the part I start to feel.
The best about certainly with.
Some of the private equity I mean, they have been.
Out of the market on some of their cell sites and many of them are always raising money and they don't go an entire year without some liquidity some in some out so again on the bid ask spread I think we're a lot closer to.
Seeing transactions there.
Okay.
Great color. Thanks for that and then I guess pivoting to the corporate finance business you saw us fairly sizable step down this quarter after seeing momentum steadily build throughout the last year.
We've heard from some of your peers that they're beginning to see underwriting pipeline builds and that they believe that activity could inflect positively in the back half.
To what Youre seeing in terms of pipelines and dialogues in the business and whether you feel there is an increased need from biotech or health care firms, yet out and raise capital given where now as you indicated in the prepared remarks five quarters into this ECM slowdown.
Yes so.
So for US we've got a couple of pieces in that corporate financing line. We've we've obviously got ECM and then we've got.
Some of the.
Debt capital raising and in particular financial services, I would say relative to ECM.
January .
Larry February where frankly sort of the same run rate, we saw the back half of last year, which.
By no means was a good.
Market, but certainly better than the first half of last year. We saw that in January February that with the things go with the turmoil going on with the banks kind of came to a screeching halt in.
After the first 10 days of March so that really impacted ECM for March I would say relative to April we're kind of right back where we were in January February .
Okay market, we're getting some transactions done in health care, we can see a path.
To launching and we do expect that to continue to get better, especially if volatility stays low here.
How big that the pool gets I mean, these are still relatively small.
Numbers, but we would see continued improvement throughout the year.
Great. Thanks for taking my questions.
And as a reminder, its star one to ask a question.
We will take our next question from Mike Grondahl with Northland Securities. Please go ahead.
Hey, Thanks, guys lot of my questions have been asked but Chad maybe an update on the DBO partners acquisition from last fall.
The tech investment, there and how's that going.
Yes.
Obviously were four five months into that we're really happy with the team frankly, we.
Pretty much fully integrated.
That from a leadership perspective from the way we are working on transactions from.
Sort of how we're dividing up accounts.
And sectors. So I think we're happy in terms of where we're at obviously that is probably one of the tougher sectors relative to announcement level and so that's certainly not playing through.
In terms of.
In terms of new transactions I would say when we've done these deals before we're pretty patient on how long that's going to take how it's going to work and really happy with sort of the platform. We have now to do business and sync in the back half and certainly going forward thats going to make a big impact on our.
<unk> business.
Great.
In the last several years, there's been a bunch of these tuck in acquisitions any others to really call out.
Are performing.
Isaly above plan.
Yes, I mean, it obviously depends on.
The stage in the.
Quarter the quarter we're in.
I would say.
Obviously now.
Trs had a really good end to last year, a really good start to this year in the restructuring market, obviously, the market's pretty conducive to that.
Frankly, one of the best performers as a cornerstone with our macro business. Obviously the environment was really good for that last year continued volatility in Q1.
It was really good.
For that so those would probably be.
Couple of examples I'd give you.
Great. Good luck the rest of 'twenty three.
Thank you.
And it appears there are no further questions at this time.
I will turn the conference back to Mr. Abraham for any additional or closing remarks.
Alright, Thank you operator, and thanks, everyone. We look forward to updating you on our second quarter results.
Have a great day thank.
Thank you.
And this concludes today's call. Thank you for your participation you may now disconnect.
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