Perella Weinberg Partners Q1 2023 Earnings Call
Management's prepared remarks, the conference call will be open for questions from the research community.
This conference call is being recorded at this time I'd like to turn the conference over to you Taylor Reinhart head of Investor Relations. Please go ahead.
Thank you operator, and welcome to our first quarter 2013 earnings call.
Andrew Burton, our Chief Executive Officer, and Gary Brandt, Chief financial.
A replay of this call will be available to be invested based on the company's website.
Approximately two hours following the conclusion of this live broadcast through May 11, 2020 way for.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today may four 2020 earnings and have not been updated subsequent to the initial earnings call.
Before we begin I'd like to note that this call may contain forward looking statements, including pwc's expectations of future financial and business performance.
Missions and industry outlook.
Forward looking statements are inherently subject to risks uncertainties and assumptions.
Could cause actual results to differ materially from those discussed in the forward looking statements and are not guarantees of future events or performance.
Please refer to Pwc's, most recent SEC filings for a discussion of certain of these risks and uncertainties.
The forward looking statements are based on our current beliefs and expectations of 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.
Pwc 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 Andrew but hard to discuss our results.
Thank you Taylor and good morning today, we reported first quarter revenues of $131 million down.
Down 13% from a year ago.
The challenging operating environment for the traditional M&A business during.
During the quarter, we continue to see longer transaction timeline.
Turning to the transaction environment generally and as a result recorded fewer fees related to large scale transactions.
Geographically, our revenue skewed even more towards the U S. So still within the range of our historical split between the United States and Europe across our platform healthcare and financials and technology continued to be active as well as energy and infrastructure.
Although mandates in our financing and capital solutions business are up meaningfully versus last year, driven by traditional restructuring fees attributable to our financing and capital solutions business. This quarter were down year over year, largely the result of the sizable restructuring transaction in Q1, 'twenty, two which made for.
A difficult comparison.
And then more capital markets Advisory business, we are now experiencing the lag effect from fed policy decisions as market conditions worsened in 'twenty, two and remained challenging in this quarter.
And the private capital market, specifically, we are still seeing a process of resetting evaluation expectations by both companies and investors, which has slowed the pace of closings.
Looking at the broader market new uncertainty was ushered in with the bank failures in force merger. This spring.
Global markets and importantly for our business.
<unk> CEO confidence.
With less urgency conviction in the boardroom relating to the traditional M&A, we witnessed a number of deals expected to announce our closed in Q1 get pushed to Q2 and beyond contributing to be elongated transaction timelines across our platform that I mentioned earlier.
Continued lack of economic clarity, a broad range of uncertainty and the related market instability affect confidence that perhaps as important as that conviction.
And these conditions are likely to adversely influenced deal timing going forward.
Notwithstanding these current conditions, we are playing the long game and our focus remains the same to scale our business.
And here are a few of the opinion, we spend time on what we can control getting even closer to our clients through challenging times capitalizing on attractive recruiting environment to build our coverage teams and always remaining vigilant about our expense base.
All our efforts, we continue to position Pwc for market leading growth opportunity ahead.
The submission to scale our business, we are strategically investing in talent to increase our client footprint.
Recruiting conditions have improved materially this year compared to prior periods.
We added five senior bankers three partners in <unk> and key strategic coverage areas and all are expected to join the firm in the coming months.
Given where we are in our lifecycle our platform offers a unique value proposition to experienced hires and our recruiting pipeline remains very robust.
Importantly, we continue to grow organically as well year to date, we promoted two partners and six managing directors in our advisory business.
We are a small firm with the big brands and the value upside as in closing that gap. So we will continue expanding our industry reach and breadth of product capabilities, while always doing what we do best providing world class advice to our clients.
<unk> was built to weather cycles in India to take advantage of cycles. Like this so we are encouraged by the opportunity in front of US right now to grow our footprint.
I want to take a moment to recognize the <unk> team for their continued hard work and commitment to our mission across our 10 offices in five countries. Our team stayed focused on our clients helped scale the business and collaborated effectively to deliver market leading results in this quarter in very difficult conditions. Thank you.
Gary I will now turn the call over to you to discuss our results in more detail.
Thank you Andrew.
As Andrew already spoke to top line performance in his remarks, I will begin with review of our expenses.
In the first quarter, we accrued adjusted compensation expense was 65% of revenues keeping within our medium term mid <unk> guidance range and below our full year 2022 expense accrual level.
Compensation margin was set based on assumptions at quarter end and our accrual could be revised as the year progresses based on business conditions with phase III bring senior talent to our platform and year end industry compensation levels.
Our adjusted non compensation expense was $35 million for the first quarter up 7%, both year over year and quarter over quarter, and largely driven by an increase in travel and related expenses and overlapping risks.
For the full year, we continue to expect growth in the non comp spend of 15% to 20% over 2022 with overlapping risk in New York into the fourth quarter and a related step up in depreciation expense tied to our new headquarters projects.
Potential legal expenses increased travel and entertainment expense continued investment in technology, and some inflationary pressures overall contributing to the increase.
Expected growth in non comp expense in 2023, including some one time items for example, with overlapping rent and is not representative of our go forward growth rate for this cost base.
We continue to look for opportunities to rationalize expenses in this more challenging environment, we manage our expenses tightly and may lead to eliminate or defer certain expenditures as we progress through the year.
For the first quarter, we reported adjusted operating income of 11 5 million and an adjusted operating income margin of 9%.
Adjusted net income and adjusted if converted net income totaled $10 million and $8 million respectively.
Adjusted if converted earnings was <unk> during the same period.
We continue to generate strong cash flow and returned $33 million to our investors through repurchases net settlement and really share issuances common stock dividends and program distributions.
Our original buyback authorization still have approximately $10 million in capacity remaining.
And we have our second $100 million authorization before.
<unk>. This morning, we declared a quarterly dividend of <unk> <unk> per share.
With that we'll now turn the call back to the operator to open the line for questions.
Thank you at this time, if you wish to ask a question. Please press star one on your telephone keypad, you may remove yourself from the queue by pressing star two will.
We will take our first question from Devin Ryan with JMP Securities.
Hey, good morning, Andrew and Gerry how are you.
Very good Todd Heavin.
First question just wanted to touch on the recruiting environment.
Talked about it being fairly attractive right now we are hearing.
That comes from others as well so just want to talk about kind of the expectation there.
Comp ratio.
The comp ratio obviously.
In the normal target range in the first quarter.
But just curious kind of.
Maybe where that could evolve to the extent you really want to lean into this recruiting environment. This year do you expect to do that and then maybe.
Places how far would you allow that comp ratio to migrate higher to the extent we're in a nickel.
Once in a decade type of recruiting environment. Thanks.
Yeah, Thanks, Kevin I think Thats, well said it as well.
Once in a decade recruiting environment I think the last time, we saw this is probably in the <unk>.
Oh nine timeframe. So we are leaning in for sure we've shown that already and we continue to be very very active on recruiting.
We're seeing just the quality of candidates and also matching up very well to our strategic ambitions, which are which are all around increasing our client footprint. So we're very very excited about the environment I think in terms of comp margin. It's early in the year. So I think we last year took up our margin as we headed.
Into the fourth quarter I think number one is that it's just early in the year to make a forecast regarding where we're going to end up but secondly, I've always tried to explain that part of our comp margin is capex. So we're all well aware that from an accounting perspective. It ends up in the P&L, but the way we look at the business.
Part of our comp margin as Capex it takes more than a year probably on average two plus years for.
Our new hires to ramp up and actually begin producing revenue and so we have sort of a two plus year capex cycle for all of our hires and the time to really deploy capital is it unusually depressed market says the one that we're experiencing now so you're necessarily going to have.
A bit of a mismatch in the timing of when you deploy that capital for new hires and when Youre going to see the return. So we are definitely leaning in and I think it's early on forecasting where the comp margin will end up but we are investing in this cycle and we think we're going to be rewarded for that as we head into 'twenty four and beyond.
Okay terrific.
Follow up here just on the environment.
And.
Right.
This kind of macro uncertainties, just continuing that elongation theme that we've been hearing about for really the past year here. So maybe just to dig in a little bit more on that.
Well just to give you any more.
Qualification of quantification around.
The level of dialogue with clients have we made progress.
And I appreciate the Crystal ball is tougher beer, but how we've made progress.
Over the past quarter or two.
And you've also added a lot of bankers as you mentioned Andrew over the past few years, so just that kind of balanced between new bankers coming online and maybe starting to contribute for the first time versus.
Yes, just the macro theme.
Bill very challenging out there thanks.
The macro is challenging there's no question about that I think most of us in the industry. So better coming into January and February I think March was a setback and as I said in my commentary that it really ushered in a new element of uncertainty and I think most of our clients are just saying.
Signals and so we operate the business in five key industries, and we're very client centric coverage model and so we don't we don't sell products to clients. We help clients solve problems right now a lot of the problems for our clients are around financing capital structure, and so are our capital solutions team and.
Liability management restructuring teams are very busy those mandates are up for sure traditional M&A is flat in terms of number of engagements for us.
But we do have a very active dialogue, particularly among among our most <unk>.
LC clients that have strong balance sheets that are looking to make.
It make strategic moves where they've got a differentiated advantage versus other strategics that may need financing and versus private equity, which continues to remain quite inactive relative to prior periods. So.
We're very busy I think it speaks to the strength of our brand and the quality of our teams we've made.
They're a strategic investments around our energy transition, our energy tranches transition team and in.
In our infrastructure team. We've just made recent investments around technology and business services and we think those are very very target rich environments for future M&A activity. So feel good about the positioning but right. Now there is no question. There is just a macro headwind for all of us.
Yes, so okay I'll leave it there, but thanks very much.
Thanks, Kevin.
Yeah.
Thank you. Our next question will come from James <unk> with Goldman Sachs.
Good morning, and thanks for taking my questions I just wanted to get your thoughts on the recent bank stress and I'd be curious.
You talked about it impacting the March event impacting the near term, but maybe just your longer term views on how this could affect the M&A business.
As well as the restructuring business regional banks, obviously did participate in a lot of syndicated financings. So I would imagine that there could be some longer term ramifications as well.
Yes, Thanks, James I think in the moment the biggest impact from all the banking situations that we saw through March and now into April and May is just the clients and boards to the extent they are contemplating significant transactions just to have a moment of pause.
And so I think it I think it.
It hits confidence in the first instance, but it's not going to affect the long term planning for our clients. So I believe that the banking stress.
The recent action around regional banks.
Is unlikely to have a long term impact on our clients confidence and conviction to move forward on larger scale M&A transactions, where I do think it has an impact just in credit.
Credit conditions have clearly tightened credits.
Credits more expensive and less available traditional banks continue to do less of what traditional banks used to do thats been a 20 year trend, where theres just an disintermediation of traditional money center banks, but now also a pulling back of traditional credit extension a lot of that's been picked up.
The private credit community and the non bank lenders that trend is actually a very significant driver of activity for our business I think.
Our industry and the.
Advisory focused firms will benefit from the trends in private credit. So we're quite encouraged by is that dislocation and continued disintermediation.
Okay, that's very helpful.
If we just turn to restructuring recession, clearly increase I think among forecasters in recent weeks, maybe you can just talk to the backdrop that you are seeing for restructuring at this point and then how much of this you would expect to impact this year versus 2024 and beyond.
Yes, so as I said in the commentary in a moment ago.
Clear clear increase in our liability management and restructuring mandates. There is no question about that.
There are a lot of stress companies I think it's not as broad based as we've seen in prior cycles. So I think it's so far quite selective.
It is quite active relative to a year ago without question.
The.
The decline in M&A.
Is still showing counter cyclicality with the restructuring business, so as M&A as fallen off we've seen an increase in restructuring the revenue curves are different though I think the decline in M&A has a pretty immediate impact on revenue, whereas the increase in restructuring, there's a lag effect in that and that curve. So I do.
You think the revenue realization from today's increased activity in restructuring is likely.
To be.
To be realized as we head into Q3, and Q4 and into 24. So I think the counter cyclicality is there I think restructuring and financing advisory is a very strong balanced for our business and thats very helpful. But I think the revenue effects of this lag is lagging the decline in M&A, but.
We're going to see that positive impact on revenue as we head back half of the year.
Okay very clear thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Stephen Ju Park with Wolfe Research.
Hi, good morning.
So Andrew I was hoping to follow up on that.
You are just the latest remarks that you made about the expectation for some tailwind potentially in the second half.
But recognize that there are some closing delays, but just parsing some of the language in your prepared remarks, you alluded to restructuring liability mandates being up meaningfully.
Engagements on the M&A side are flat.
If we start to see some of these revenue tailwind materialize in the back half is it reasonable to expect revenues to potentially even grow in 'twenty three versus 22, even in the face of some of the macro headwinds you cited or are these <unk> more of a 2020 for its story just given the delays in closings that we've seen thus far.
Yes, Thanks, Stephen I think it's really hard in our business to try to pinpoint the exact timing of when we have inflection points.
And when we have accelerants in revenue progression I do think that you need mandates to get revenues. So I think we have the.
<unk>.
Future revenue in our system, but it's very very hard to pinpoint exactly the timing.
So I do think that the restructuring mandates we have will convert to revenue.
We'll start to see that back half of this year I think it will continue into 2024, but I'm not making any broad prediction about how much of an offset that is to declining M&A and I think in M&A, while we're not completely tied to the broader market and we certainly arent moving in lockstep.
With broad M&A trends with announcements down 48% in closings down 53%, we obviously outperformed that market substantially but were still somewhat tied to it and we do feel it in the M&A market. So I think we have to see an increase in an announcement activity and thats the harbinger to future close.
<unk> revenue, which as I said, we're definitely seeing elongated timelines, but we're not seeing much of a decline in overall activity. We're just not getting the announcement.
<unk> that we were seeing last year and certainly in 'twenty one.
Great and just for my follow up on capital management.
You still appear to have plenty of excess liquidity at the moment been relatively consistent with the buyback give.
Given some of the revenue uncertainty, but at the same time, the very attractive recruiting backdrop, just wanted to get a sense as to how we should be thinking about the magnitude or the cadence of buyback over the remainder of this year.
Yeah, Stephen I'll take that.
You are raising exactly kind of the right sort of considerations that we think about right.
Our balance sheet remains quite strong we have a great cash position, we obviously have no debt.
But we are in an environment, where there is.
Potentially very accretive capex capex opportunities to use to use Andrew's words going forward here. So it's really something we're going to monitor were not going to we're not going to project out a.
Future levels of buybacks.
But we see it very much the same way if there are more attractive opportunities to deploy capital.
Purchasing shares we'll put it where most of the most attractive opportunities are.
Alright, thanks for taking my questions.
Thanks.
Thank you. Our next question comes from Matt <unk> with K B W.
Hi, good morning.
Good morning.
Morning.
Sites are shifting the geographic revenue contributions in the U S for this quarter.
From the industry data, we can see.
Sure.
The announced a richer mix phenomenon.
Continued near term, but kind of curious so if there is any of that revenue.
That.
Industry wide data and comparisons.
<unk> seen some to some degree and kind of any other general comments on the environment.
The U S and Europe , the primary geographies it would be great to hear.
Yes, I think we are still.
We're still kind of in our bands of mix between.
Purchasing shares we'll put it where most of our most attractive opportunities are.
Our U S business and our European business, and so I think we're going to have some movements from our average from time to time, but generally we're still within the band of that mix. So I'm not seeing anything that's structural or sort of permanent movement away from those traditional bands I think.
Hey.
Our bankers on the ground in Europe report similar conditions as our bankers on the ground in the United States. They are active with their clients as I said, we're very client centric model. So our industry coverage teams are constantly with clients in <unk>.
Serving their needs a lot of those needs are around capital structure.
Then.
With respect to Europe versus U S. Again, I don't think there is much of a distinction.
And companies continue to look for ways to optimize our portfolio of ways to grow and so M&A dialogue continues to be very much part of the corporate toolkit that people will think about and that's the case in U S and Europe .
And then kind of sticking to the topic.
Different client bases and so let me drill down on what Youre seeing maybe between the difference of strategics with sponsors.
James and sponsor community is still seeing higher levels of degradation strategics, but.
On the other hand could also be quicker to market and just kind of curious so what you're seeing in kind of the points that we need to see.
Maybe just some kind of term.
Yes.
For both of those.
Yes.
Yes, so I think <unk> see the data as much as I do so I think the sponsor activity is down more than the broader market is down. So no question, we're seeing a.
Slower environment for the financial sponsor community.
Though they have an enormous amount of capital that will be deployed we are still very optimistic that the private equity community will be very active both in terms of buy side and sell side, but also in terms of there.
Private.
Our credit.
Businesses that will also need to deploy capital as I mentioned earlier that trend is a positive for.
For our business.
I think that strategics have the advantage in a tougher credit market right now.
We're still seeing a resetting and adjustment to tightening credit conditions, the 10th fed move in a year.
Yesterday and once we have a full adjustment and are settling and then I believe that private equity will reemerge as a very active participant in the M&A.
<unk> in 2006, and seven we had a similar.
Targeted fed funds rate is where we are now in the five plus zone and we had an enormous amount of private equity activity. So I think we just have to get to.
Full adjustments to a different credit environment, and I think that activity will resume but we're still in the adjustment phase.
Alright, thanks, guys.
Thank you.
Thank you we do have a follow up question from Stephen <unk> with Wolfe Research.
Hi, Thanks for indulging the follow ups.
Gary I did want to ask about the non comp growth trajectory I recognize you're probably not ready to give 2024 guidance yet, but it does feel like there are number of one timers that are inflating the level of growth in 2023, just wanted to think about how we should think about normalized Kate.
And then in terms of non comp growth whats a reasonable expectation given some of the recruiting targets that you guys have outlined.
Yeah.
Yes look I think that first of all if you can look at the non comp growth this year.
And any increases most of the items. They are really awesome tied to investment in various ways. So we obviously have the.
Two headquarter build out which is which have some double rent in them.
And we will have some stepped up depreciation this year as well as going forward.
But again to reiterate even though word we've significantly increased our square footage in those two locations. Our actual rent costs are actually coming down in the aggregate a bit not a lot, but it basically flat on much higher square footage, but that's been an investment to allow for future growth.
The other increase has been in the area of another another area of growth for us so.
But our business. This year is somewhat outsized, we arent, giving.
As you anticipated guidance for 'twenty, four but as I kind of mentioned in my prepared remarks.
Kind of the level that we see year over year isn't it isn't a level that we see sustainable certainly into next year and beyond.
The other thing we are seeing excuse me in <unk>.
You can see this in our numbers and our peers is we are seeing TMA has really kind of come back to.
To aggregate levels that are similar to what we saw in 2019 silver.
Still below on a per head basis, but with the head count growth that allowed us I've seen that's coming back and Thats, what thats a good thing for our business because it means our people are getting out in front of their clients more ad.
But that is another form of investment.
Okay.
Just as it relates to the comp ratio the comp accrual of 65% encouraging to see that it is below the full year comp accrual in 'twenty two.
Wanted to understand what that is contemplating in terms of activity levels as well as our recruitment is that 65%.
A reasonable baseline for us to be modeling for the full year 'twenty three based on what you have visibility on to that.
Yes, Stephen what I mentioned earlier is that it's <unk>.
Q1 number based on what we're seeing in Q1 I think it's early to forecast, where we're going to end up and as I said earlier.
In any situation, where you find us having an elevated comp margin is really about capex and not about steady state P&L item that you guys need to think about in terms of earnings power of the company. So.
Again, I look at it as Capex.
We're not too early in the year to suggest where we're going to be by the end of the year other than to say as I said earlier, we have a very attractive recruiting environment, we're going to take advantage of that not just to build numbers. That's not what we're about we're building quality and then people that fit with our strategic needs and desires and we are.
Finding.
Very high quality people to do that.
If I could just add to what Andrew said.
The technical accounting matter.
5% was our view of the full year as of March 31. It was our best view as of that date back to Andrew's point, it's very early in the year.
Great. Thanks for accommodating the follow ups.
Thank you. Thank you.
Thank you. This concludes the Q&A portion of today's call I would like to now turn the conference back to Mr. Andrew <unk> for any additional or closing remarks.
Great. Thank you everyone for joining the call. We appreciate your continued support and interest in our firm and look forward to talking to everyone on our Q2 call in August . Thank you.
Thank you. This concludes the Perella Weinberg partners first quarter 2023 earnings call and webcast you may disconnect your lines.
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