Q1 2023 PJT Partners Inc. Earnings Call
Please standby good.
Day, and welcome to the P. J P. Partners' first quarter 2023 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Sharon Pearson head of Investor Relations. Please go ahead ma'am.
Thank you very much good morning, and welcome to the P. J T partners, that's closer to 'twenty to 'twenty three earnings conference call.
I'm, Sharon Pearson head of Investor Relations at P. J T partners and joining me today is Paul Taubman, our chairman and Chief Executive Officer, and Helen makes our Chief Financial Officer before I turn the call over to Paul I want to point out that during the course of this conference call. We may make a number of forward looking statements.
These forward looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements.
We believe that these factors are described in the risk factors section contained in P. J T partners Twenty-twenty Form 10-K, which is available on our web site at P. J T partners dotcom.
To remind you that the company assumes no duty to update any forward looking statements and the presentation. We make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance.
And thank you all for joining our first quarter report.
The current market environment can best be described as treacherous.
As the unprecedented magnitude of fed rate hikes.
China is to take their toll.
This historic monetary tightening campaign has taught numerous financial institutions wrong footed, creating deposits funding vulnerabilities.
Causing significant financial institutions to come undone.
The deposit migration, resulting from these bank failures.
Coupled with rising funding costs well.
Well inevitably trigger a more restrictive credit environment.
Slow economic growth.
And increase the odds of a recession.
It is not surprising that worldwide M&A activity has fallen to levels not seen in nearly 15 years given their credit conditions have not been in this challenging in nearly 15 years.
In this difficult market environment, our firm performed well on a relative basis.
Revenues in strategic advisory and restructuring combined.
Only 5%.
Worldwide revenues, which also include the P. J J Park Hill business.
And reflect a nearly $40 million step down in P. J J Park Hill revenues.
Declined 19% year on year.
Since our firm's beginnings our investment priorities have always been about attracting and developing best in class talent at all levels.
Notwithstanding today's subdued M&A activity.
Our commitment to that investment strategy.
Our confidence in the returns from that investment.
Have not waned.
In this stressed environment, we are seeing an unprecedented number of extraordinarily talented people who want to explore a career at P. J T.
We fully expect that 2023 will be a record recruiting year for our firm.
After how it takes you through our financial results.
I will review our business performance strategic priorities.
Outlook in greater detail.
Hello.
Thank you Paul good morning.
Beginning with revenues total revenues for the quarter with 200 million down 19% year over year, driven by meaningfully lower revenues with P. J P patio.
Strategic advisory revenues were modestly lower year over year, while restructuring revenues were comparable to year ago levels.
Turning to expenses consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments, which are more fully described in our 8-K first adjusted compensation expense.
Adjusted.
<unk> expense was 66, 5% of revenues for the first quarter compared to a three year ratio in 2022 Ah 64, 1%.
Unlike prior years.
First quarter accrual does not reflect our best estimate for the full year.
The higher first quarter compensation expense reflects increased fixed compensation expenses against lower revenues compared to year ago levels.
Given the continued uncertainty in the marketplace.
Coupled with our unprecedented levels of senior recruiting dialogues, we will provide our best estimate of the full year compensation ratio. When we released our second quarter results.
While the factors, which affect the ratio of fluid.
Full year compensation accrual rate will likely be materially higher than last year's 64, 1%.
Turning to adjusted non compensation expense.
Total adjusted non compensation expense was $36 5 million in the first quarter up slightly from $35 million in the first quarter last year.
Higher expense was primarily driven by increased business travel and entertainment expense.
The modest year over year increase in the first quarter, we expect our full year non compensation expense in 2023 to grow in aggregate in the low double digit range from last year.
That growth will be principally driven by higher costs related to travel and entertainment as well as higher professional fees.
Turning to adjusted pretax income.
Our adjusted pretax income was $13 million in the first quarter compared with 56 million in the same period last year and our adjusted pretax margin was 15, 2% for the first quarter compared with 22, 8% for the same period a year ago.
Provision for taxes as with prior quarters, we presented our results as if all partnership units had been converted to shares and that all of our income was taxed at a corporate tax rates.
Our effective tax rate was 26% for the first quarter in line with our full year 2022 right.
The tax benefit relating to the delivery of vested shares during the first quarter at a price higher than their amortized cost with similar to last year's benefit.
We take a full year view of that benefit and we currently expect our full year effective tax rate to be around 26%.
Earnings per share our adjusted if converted earnings were <unk> 54 per share for the fifth quarter compared with $1 per share in the first quarter last year.
On the share count for the quarter, our weighted average share count was 41 7 million shares flat versus a year ago.
During the first quarter, we repurchased the equivalent of approximately one 2 million shares primarily through open market repurchases.
In addition, we plan to exchange 139000 partnership units for cash on May nine 2023.
On the balance sheet, we ended the quarter with 99 million in cash cash equivalents and short term investments and 268 million and net working capital and we had no funded debt outstanding.
Finally, the board has approved a dividend of <unk> 25 per share the dividend will be paid on June 21, 2023 to class a common shareholders of record as of June seven and the federal to Mexico.
Thank you Helen.
Let me review the businesses beginning with P. J J Park Hill.
As we telegraphed on our last earnings call.
P. J J Park Hill revenues declined nearly $40 million from year ago levels, given limited fund closings and difficult comparisons with.
The fundraising environment for alternative investments continues to be challenging.
Despite the recent recovery in public market valuations.
Dominator effects still weighs on alternative asset allocations.
This over allocation has been magnified by the sharp reduction in capital returns to Lps, given the relative dearth of monetization via M&A IPO.
Jos and leverage recapitalization.
As a result, we're seeing smaller fund raises and longer marketing periods.
P J J Park Hill with its best in class distribution capabilities.
<unk> is the go to firm and fund raising.
And this challenge fundraising environment P. J T part <unk> should be able to make up some of the first quarter deficit, but not all keeping.
Keeping P. J J Park Hills 2023 revenues below last year's record revenue levels, even with continued progress in our secondary or private capital solutions business.
And restructuring our first quarter restructuring revenues were comparable to last year's first quarter levels.
We are benefiting from higher levels of restructuring activity.
Which we expect will remain elevated for some time.
A difficult economic backdrop has pressured corporate fundamentals across the board.
Not surprisingly companies with Levered balance sheets are finding higher financing costs and a more restrictive credit environment, particularly challenging.
Distressed is being felt more broadly across industries and regions and default rates continue to move higher.
Consistent with last quarter's commentary.
Turning to strategic advisory.
While the broader M&A environment continues to be quite difficult.
Revenues for our strategic advisory business were down only modestly in the quarter relative to year ago levels.
The decline was significantly less than the decline in industry wide completed volumes.
We're certainly not immune to a more challenged M&A backdrop characterized by more restricted capital access higher financing costs and more aggressive antitrust enforcement.
Our progress however remains less tethered to the overall M&A environment and.
And much of that progress is driven by the success of our recruiting efforts.
The maturation of our teams and the growing recognition of our brand.
Our mandate count.
Down approximately 10% from year ago levels.
Has grown appreciably since the start of the year.
With a discernible uptick in April .
While we are confident in our progress client by client.
Given the fragile nature of the broader M&A market.
We remain cautious on the performance of our strategic advisory business in 2023.
Nevertheless, we are positioned to outperform on a relative basis.
Given the investments we have made in this business.
Longer term, we remain confident in our strategic advisory growth prospects as we continue to leverage and integrate our enhanced capabilities.
Expand our client footprint and.
And benefit from greater brand recognition.
With respect to talent.
Given the current focus in the marketplace on recruitment.
I'd like to reiterate our philosophy regarding investments in human capital.
Over the past eight years, we have not wavered.
We have consistently been focused on investing in and attracting the right talent at all levels.
Integrating this talent into our firm and infusing it with a culture of collaboration.
Maintaining discipline in our compensation practices.
We're rewarding the right types of behavior and performance.
And remaining focused on the long term.
This philosophy has been key to our success.
By staying true to this philosophy, we do right by our clients we.
We do right by our shareholders and we do right by our employees.
With respect to the cadence of our hiring many of the impediments, we have previously spoken of.
Or no longer obstacles.
The current environment has presented us with an extraordinary opportunity.
To aggressively accelerate the pace of senior hiring.
While remaining true to our core principles.
The elevated level of hiring dialogues this year brings with it uncertainty regarding the precise magnitude of our hiring.
Notwithstanding the progress we are seeing in our client dialogues.
The challenges in the broader M&A market place.
Bring with it heightened uncertainty regarding our ability to translate that progress into 2023 financial results.
Taken together, we expect to report an elevated compensation ratio this year.
By then we will have a much better sense as to the magnitude of those elements.
As we look ahead.
We expect to navigate 2023 better than the macro backdrop would suggest.
We expect any declines in our strategic advisory revenues to be more modest than declines in overall M&A activity.
These declines will be more than offset.
By increases in our restructuring business.
While these are difficult and challenging times, our firm is built to weather difficult and challenging times.
We will continue to invest to strengthen our firm.
And we remain very confident in our prospects.
And with that we will now take your questions.
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 the signal to reach our equipment again, if you'd like to ask a question. Please press star one.
First question comes from Devin Ryan with JMP Securities. Please go ahead.
Hey, good morning, how are you guys.
We are well good morning, Kevin.
Great.
You start with a two part question here.
The first part is you know what this is Paul I'll get a little bit of a finer point on the.
Unprecedented recruiting environment I appreciate it's hard to predict what this year will look like but just.
Anything you can give us how many more serious conversations youre, having and just kind of the size and scale of kind of the those types of conversations and then the second part of that is just the comp ratio interplay. So the 66, 5% comp ratio you appreciate that we're going to get maybe more of a full your update in.
Quarter, but.
How much in that kind.
Contemplating this much stronger kind of recruiting backdrop, where potentially you could lean in and take it.
Okay, Let me let me come at this we've.
We've consistently spoken about the challenges of the last few years and recruiting we've talked about Covid COVID-19 lockdowns trying to recruit in a virtual world. We've talked about the fact that when the COVID-19 fog lifted there was unprecedented activity levels.
And when you have unprecedented activity levels, the switching cost and ability to engage in dialogues is meaningfully compromise and we've talked about the fact that we have very precise.
Criteria for what is best in class talent, and how that talent it fits into our organization and that we were not going to be in any way slaves to recruiting targets and as a result relative to long term trend. While we were very consistent in the growth of the overall.
Head count, we've probably added less senior partners than we would have in more normal times.
Now in this environment the world is very different and it's a world that we're going to benefit from I would just say as an example, we probably sit at the end of April with the same number of hires as we have for all of last year.
At the senior level.
So that will give you some appreciation that four months into this year, we have essentially matched our hiring for last year.
And the number of dialogues and the quality of individual the dialogues that we're having.
Is going to absolutely turned this into a record recruiting year for us at the senior levels.
Okay.
Okay.
Maybe just to.
The comp ratio inner play as well.
<unk>.
That will be.
Be affected by this higher recruiting and what that 66, 5% is our baby already implying about the outlook there.
Well I think that I think the 66 as Helen said it really just stands on its own for the first quarter and it's reflective of.
The low revenues in the first quarter relative to full year.
Higher fixed costs in the first quarter and then in the second quarter, we will return with our best estimate as to full year compensation to revenue ratio, but I think just to address the point.
The reality is we've made significant investments in talent at all levels, we've grown our head count considerably we are seeing very meaningful progress.
And the acceleration and the quality of our client dialogues that mandates received the strength of the health of the business gets us to be incredibly optimistic about where we're headed so we're at this difficult inflection point, where we've added a lot of head count.
We're looking at this as an opportunity to increase the hiring principally at the senior levels. This year I think this year is probably the composition is going to change where perhaps we may add less aggregate individuals', but it'll be far more senior weighted than in the past.
In an environment, where we're making significant investments, where we're seeing tangible progress and where the firm is clearly strengthening itself for the intermediate to long term and in an environment, where there's a lot of uncertainty as to how much of that progress will be reflected in our 2023.
Financial results it is inevitably going to pressure the comp ratio.
Yes, Okay very clear I appreciate that and then the follow up.
It is on the outlook commentary. So appreciate all the detail you gave.
We've I heard correctly that.
Yes.
A potential slowdown in M&A should be more than offset by restructuring activity. This year, and so I guess I'm just trying to square.
<unk>.
Or even quantify more on the restructuring acceleration and kind of what youre seeing there or anything you can give us an order of magnitude or a number of mandates similar to how you provided detail on the M&A business and then also what that maybe books likes I know the revenues have a pretty healthy wag generally on them relative to the announcements so.
Okay.
Got it sort of get 2023 is done and dusted what I would say is I think we perhaps earlier than others saw a significant pickup in restructuring activity and we've been communicating for some period of time that we see.
The credit markets, becoming increasingly distressed.
As increasing awareness of the wall of maturities, which are starting to creep up and there is a very significant quantum of debt that needs to be addressed over the next three years, we're seeing a lot more proactive management of liabilities and capital management exercises.
We're starting to see companies need to.
Address their liability stack through chapter 11 proceedings, where we're seeing it kind of across the board at its broad based.
And the activity levels that we're seeing are meaningfully accelerated relative to where they were a year ago. There's no doubt about that and it's broad based it's broad based by industry is broad based by type of assignment, it's broad based by geography.
And I.
I think as we see.
Set previously.
That increase in activity will begin to flow through the income statement, starting in the second quarter and while the first quarter of revenue contribution was comparable to a year ago I think starting in the second quarter Youll see a significant increase.
In restructuring revenues and I expect that that will continue for an extended period of time, but I'm not necessarily prepared to tell you for how long and the exact quarter, but I think theres no doubt that we're in a different phase of the restructuring.
The restructuring cycle and all we're really experiencing our default rates beginning beginning to approach long term trend lines.
We're not dealing with.
Sort of Lockdowns and Covid hysteria and the like we're dealing with just the ever more normalized.
Credit conditions relative to aggregate interest rates default rates and the like and if we get to high stress environments than those restructuring levels.
Moved up meaningfully could step function up again, but I don't think we're there yet and we may never get there, but we're certainly going to get to a level of activity that is far greater than what we experienced in 'twenty one and.
'twenty two.
Got it okay.
Oh thanks.
Our next question comes from Steven <unk> with Wolfe Research. Please go ahead.
Hi, good morning.
Good morning, Tom why they wanted to start off Paul with just a question on P. J T Park Hill fundraising as you noted remains challenged.
Part of the difficulty here is you cited the over allocation issue, which has been magnified in this environment.
I'm trying to understand whether this is a secular issue for the business as it's not really clear to us how this over allocation overhang ultimately gets resolved.
Well I think it gets resolved in one of three ways right I mean ultimately it gets it gets resolved one is public market values snapback.
The second is it.
Private equity meaningfully reduces the capital that they are deploying.
Then you get back into balance that way as painful as it maybe to the M&A market, we're experiencing some of that today.
And then some of that gets addressed when the capital markets get back to equilibrium in the IPO markets open up when leverage recapitalization begin to be actionable again and win more of these portfolio companies are offered up for sale and you create monetization events. So we're just sort of at a dislocate.
I mean, the beauty of the business as well there may be an inflection point that doesn't need Alaska terribly long before you get everything back into.
Its equilibrium and we're just sort of in that air pocket until it gets back into equilibrium, but a lot of what's going on today, which has meaningfully reduced.
Investment by private equity is indirectly getting to some of this and as the public markets begin to recover and grind higher that's dealing with some of this too.
I hope what color Paul I, just one follow up for me on the comp ratio.
You cited some of the pressures relating to recruitment or elevated levels of recruitment in this environment why and to take advantage as we think about a backdrop, where we start to see an inflection in M&A activity. Eight next year. Some continued healthy levels of activity on the restructuring side is it reasonable to expect that full year.
Comp ratio in 2024 could get more in line with historical levels.
Look I think what I would say I'd go back to what I said three months ago, which is if you ask me to look out too.
Two to three to four years.
My Crystal ball gets a lot clearer.
And I see the operating leverage and the returns on the investment we're making.
But if you're asking me to look at the here and now where we are potentially.
Wrapping up the recruitment levels.
And where we're seeing a lot of progress in the building out of the firm and we're hiring the right people and we're getting the right results and we're strengthening the firm but in this current environment.
We don't have the revenues that correspond with the investment in the near term.
It gets turbulent in the near term, but as we get past it looks normalized and like so everything I said three months ago I think remains true today.
Probably what's a little different as we get into the year is the recruiting opportunities are greater than what we had expected at the beginning of the year.
I think the progress we're seeing in the build out of our firm is greater than what we had you know.
<unk> expected or hoped for and I think the third is while we've always known this would be a challenging marketplace from M&A activity perspectives and volumes and the like I think probably it's clear.
Clear that well that's not probably it is clear that the transmission from progress with clients to revenue recognition is going to be delayed so as soon as we get past this.
Bit of a hump I think we'll get back to normal levels.
Great color Paul Thanks, so much for taking my questions.
Absolutely.
Our next question comes from Jim Mitchell with Seaport Global. Please go ahead.
Hey, good morning.
Well, maybe just on the M&A environment and outlook, we've heard from some of the large your larger peers and smaller appears just sort of the dialogue levels remained elevated people sort of getting their plans together, but you got the strategic side.
Our win environments do get better are you seeing that are you seeing dialogue levels hang in there and do you feel like.
Once things clear up on the macro side that things could bounce back or how how are you sensing the M&A environment.
Look it's difficult for me to answer that question, because we we don't touch everyone right. We don't we still have a smaller footprint and a lot of our progress is a function of micro.
Micro elements, which is.
We've added to our platform how long they've been on the platform colleagues they have to work with.
Ever increasing comfort and excitement about the firm more brand awareness all of that I think it's clear that we're seeing.
A lot more activity in Europe .
I think we're seeing a lot of activity in the $1 billion to $5 billion transaction size.
I think we're starting to see private equity return take advantage of some of these dislocated.
<unk> I think we're seeing strategics think about.
Big things because some of their grander aspirations have been put on hold and at some point they need to get on with Reconfiguring, our repositioning their firm.
But <unk>.
Trying to translate all of that into sort of a sustained recovery and when it when it hits and exactly where it.
Is difficult I suspect that overall M&A volumes will remain muted for for a while longer.
One thing, which is different about the second half of this year versus the second half of last year.
As well you had depressed volumes in the second half of last year.
The second half of last year, it was a dramatic deceleration.
The deterioration in business conditions and market prices relative to the first half that's not the case here and I think sometimes is the rate of change that has the most jewelry. So I think this is sort of how you begin to build a base and.
And grow from here.
No. That's helpful color and just maybe on how to think about or size. The restructuring contribution with the M&A contribution strategic adviser country's down are we at a point where the the restructuring businesses is bigger than strategic advisory at this point just for.
For us to think about the drivers of your total revenue. If there is any way to size that contribution would be helpful.
I think I think we need to see where the full year.
Turns out because it's not clear at this point in time, you know that.
Magnitude of either the up in restructuring where the down in strategic advisory will be so it maybe later in the year. We can we can address that but what I am confident of.
As as a pair trade or taken in aggregate that those two businesses together will generate incremental revenues this year relative to how those two businesses performed last year.
Okay, Okay fair enough. Thanks.
Our next question comes from Matt <unk> with K B W. Please go ahead.
Yeah.
Hi, good morning.
Were very clear from your good morning.
Very clear from your prior remarks on the continued emphasis on recruiting.
Particularly on the senior side.
Just curious if you could just expand upon what verticals of the business Youre seeing the best opportunities in as well as if there are any specific geographies you see relative strength.
And these opportunities that would be great to hear.
Look I think where we're always trying to start with the individual because.
Recruiting and an a plus space in terms of activity and wallet, but if you don't get the right individual or individuals.
That's not the way to build the business for the longer term so a lot of this.
It is a function of trying to find individuals who have differentiated talent and work well.
And this organization clearly if we already have the space covered then we're not going to just add duplicative resources, but if theres an opportunity to go from strength to strength.
I Gotta take strength that we're going to enhance it if we can add additional resources that make us that much more powerful, but we clearly have an eye on expanding our successes in health care and to go deeper.
We want to expand our presence and technology, we want to expand our build out in Europe .
To expand our efforts in consumer retail there are other that's the beauty of this firm is theres, an awful lot of white space and there's an awful lot of opportunity and then there are other spaces, where we have leading <unk>.
Franchises that are mostly built out but the reality is we can we can take it to yet another level by going from strength to strength. So it's it's quite broad based in terms of geography and industry and sometimes when you're adding you know individuals' one or two to our space.
The near to intermediate term return is not very much.
And it's only when you add the third or fourth resource that you sort of light up the network. So that's why sometimes the the delivery system between investments and revenue recognition can take longer. It's a function of whether you are you are buttressing straights or whether you're investing in true true white space, but where.
We're taking advantage of it across the board, but we're being incredibly disciplined planned about making sure. We have the right people with the right talent and the right cultural fit and when we see that and we're seeing a lot more of that today, we're taking advantage of it.
Okay, Great and then just.
More of a cleanup question for me on the non comp expense side. I believe you said that this should be up double digit percentage.
<unk> percentage points versus the 2022 levels in 2023.
I believe you had talked about that being in the mid to high single digits last quarter and this compares to kind of the 4% rate we saw.
In the first quarter of this year. So just kind of curious on that divergence between bullets and kind of what areas, we should be thinking about in terms of driving this.
This change in expectations.
Yes.
We stopped trying to breakout travel and look at.
Everything travel and Grace and just talk about the full expenses.
So that low double digit as I mentioned is really driven by increase and business travel and business Entertainment and professional fee. So that's that's our best estimate right now and we will continue to update that view.
Okay, great. Thank you guys.
Our next question is a follow up from Stephen Toback. Please go ahead.
My apologies I intended to exit the queue, Matt just answered my question I asked my questions and thanks very much.
Thank you.
That was our final question, we will now turn the call back to Paul Taubman for his closing remarks.
Well I, thank everyone for being with us and for your support and we look forward to speaking again, when we report our second quarter results. This summer. Thank you all very much.
[music].
Yeah.
Okay.
Yes.
Yes.
[music].
Yeah.
Okay.
Yeah.
Yeah.
Yeah.
Okay.