Q2 2023 PJT Partners Inc Earnings Call
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Speaker 2: Good day and welcome to the PJT partners second 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. Classic fakeaddici.org
Speaker 3: Thank you very much. Good morning and welcome to the PJT Partners second quarter 2023 earnings conference call. I'm Sharon Pearson, head of investor relations at PJT Partners. Joining me today is Paul Taubman, our chairman and chief executive officer and Helen Mates, our chief financial officer. jerd District of
Speaker 3: 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.
Speaker 3: 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.
Speaker 3: We believe that these factors are described in the Risk Factors section contained in PJT Partners 2022 Form 10-K , which is available on our website at PJTPartners.com. I want to remind you that the company assumes no duty to update any forward-looking statements.
Speaker 3: and that the presentation we make today contains non-GAAP financial measures which we believe are meaningful in evaluating the company's performance.
Speaker 3: For detailed disclosures on these non-GAAP metrics and their GAAP reconciliations, you should refer to the financial data contained within the press release we issued this morning, which is also available on our website. And with that, I'll turn the call over to Paul. Thank you, Sharon. Good morning, everyone, and thank you for joining us.
Speaker 4: As our results indicate, our firm delivered stellar revenue performance.
Speaker 4: for the three and six month period, notwithstanding a very challenging backdrop.
Speaker 4: Second quarter revenue of $346 million was up 49% year over year and is the highest in our firm's history.
Speaker 4: This record-setting result was driven by extraordinary performance in our restructuring business
Speaker 4: combined with strong relative performance in strategic advisory.
Speaker 4: For the six months, firm-wide revenues increased 14% to $546 million.
Speaker 4: compared to the prior year.
Speaker 4: While the market tone has improved significantly from three months ago,
Speaker 4: M&A announcements remain at anemic levels.
Speaker 4: with annualized deal volumes tracking to levels that haven't been this low in more than a decade.
Speaker 4: Even though our strategic advisory performance has been hampered by the lackluster M&A environment,
Speaker 4: There is a silver lining. This subdued M&A backdrop has enabled us to considerably step up the pace of senior hiring.
Speaker 4: We've always talked about the difficulties in hiring during periods of frenetic M&A activity.
Speaker 4: So it is not a coincidence that the spike up in our talent investments.
Speaker 4: has occurred during a very significant two-year downturn in overall M&A.
Speaker 4: While the stepped up investment at the lows of market activity is pressuring our near-term pre-tax margins, it is consistent.
Speaker 4: with our focus on creating sustainable, long-term value for our shareholders.
Speaker 4: We are confident that this investment will prove to be highly accretive.
Speaker 4: confident that this investment will prove to be highly accretive over time.
Speaker 4: after Helen takes you through our financial results.
Speaker 4: I will review our business performance recruiting activity.
Speaker 4: and outlook in greater detail.
Speaker 3: Ellen. Thank you Paul, good morning. Beginning with revenues.
Speaker 3: Total revenues for the second quarter were $346 million, a record quarter of 49% year over year. As Paul mentioned, the growth in revenues was driven by strong performance in restructuring.
Speaker 3: Strategic Advisory Revenues were up modestly year over here, while PJT Park Hill revenues were meaning free lower compared to year-go levels.
Speaker 3: For the six months into June 30, total revenues were $546 million, a record first half, up 14% year-over-year. A significant increase in restructuring revenues more than offset a decline in PJT Park Hill revenues with strategic advisory revenues essentially flat compared to year-ago levels.
Speaker 3: Turning to expenses, consistent with prior causes we presented the expenses with certain non-gap adjustments, which are more fully described in our 8K.
Speaker 3: First, adjust the compensation expense.
Speaker 3: We accrue to just a compensation expense at 69.5% of revenues for the first half of the year. This ratio represents a current expectation for the full year 2023.
Speaker 3: We accrued compensation expense at 71.2% in the second quarter in order to bring our six month accrual to 69.5%.
Speaker 3: There are a number of factors driving the increase in the compensation ratio, as Paul mentioned, the current operating environment has presented us with the opportunity to make significant investments in seeing your talent this year.
Speaker 3: primarily in strategic advisory, with almost all of our senior level hires joining us in the second half of the year.
Speaker 3: In addition, cumulative investment in recent years to build out our strategic advisory franchise is against the backdrop of a decline in strategic advisory revenues last year and an expectation for a further decline this year.
Speaker 3: Turning to adjusted non-compensation experience.
Speaker 3: Federal adjusted non-compensation expense with 44 million for the second quarter at 7 million year over year, and 81 million for the first half up 9 million year over year.
Speaker 3: As a percentage of revenues 12.8% from the second quarter and 14.8% in the first half.
Speaker 3: Total adjusted non-compensation expense grew 12% in the first half of the year compared to the same period last year. We view the six month growth rate to be more indicative of the growth rate for the full year, with full year increases driven by higher professional fees, higher occupancy costs, as well as increased costs related to travel and entertainment.
Speaker 3: Turning to adjusted pre-tax income. We reported adjusted pre-tax income of 56 million for the second quarter and 86 million for the first six months. Our pre-tax margin of 16% for the second quarter compared to 21.1% for the same period last year.
Speaker 3: 15.7% for the first six months, completed 22% for the same period last year.
Speaker 3: The provision for taxes, as with prior courses, 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 rate.
Speaker 3: Our effective tax rate for the first half of 2023 was 26.7% and we expect this to be our effective tax rate for the full year.
Speaker 3: per share are adjusted if converted earnings, with 99 cents per share for the second quarter and $1.52 per share for the first six months.
Speaker 3: On the share count for the quarter, our weighted average share count was 41 million shares. During the second quarter, we repurchased the equivalent of approximately 737,000 shares primarily through open market repurchases.
Speaker 3: Our repurchases in the first six months total approximately 1.9 million shares, including the exchange of partnership units for cash.
Speaker 3: On the balance sheet we enter the quarter with $226 million in cash, cash equivalents and short-term investments, and $313 million in networking capital. And we have no funded debt outstanding. Finally the board has approved a dividend of $0.25 per share. The dividend will be paid on September 20, 2023.
Speaker 3: to class A comments shareholders of record as of September 6th.
Speaker 3: And now turn back to Paul.
Speaker 4: Thank you, Helen. Beginning with Restructures.
Speaker 4: Our second quarter restructuring revenues were our highest ever, as we benefited from a significant number of transaction closings.
Speaker 4: For the first six months of the year, our global restructuring business remained a market reader, ranking number one in announced and completed transactions in both the US and globally.
Speaker 4: We expanded our market share as we advised on a greater number of high value added liability management engagements.
Speaker 4: We continue to invest in our team and in our coverage footprint.
Speaker 4: to better capitalize on opportunities with both sponsors and corporates.
Speaker 4: as well as capital providers across geographies.
Speaker 4: As with strategic advisory, restructuring revenues can fluctuate considerably quarter to quarter, given the uneven pace at which transactions complete.
Speaker 4: While we do not expect to achieve a repeat of our second quarter restructuring results anytime soon,
Speaker 4: This restructuring cycle has legs.
Speaker 4: we expect our level of activity to remain elevated for some time to come.
Speaker 4: Even though improving capital markets are likely to provide companies with greater access to capital,
Speaker 4: The cost of such capital will continue to be a headwind for highly leveraged companies.
Speaker 4: given the magnitude of recent Rayhikes. This combined with disruptions resulting from technological innovation and changing consumer preferences
Speaker 4: is likely to pressure an increasing number of companies across a broad array of industries. As a result, we expect default rates to move considerably higher from here.
Speaker 4: Turning to PJT Park Hill.
Speaker 4: The fundraising environment for alternative investments remains extremely challenging.
Speaker 4: Even though public market valuations have improved substantially in recent months,
Speaker 4: The record level of capital raise for alternative investing
Speaker 4: Coupled with the paucity of recent capital returns to LPs.
Speaker 4: has resulted in a significant overhang for investors.
Speaker 4: Until the rebound in market valuations translates into meaningfully higher return of capital to LPs.
the fundraising environment is likely to remain challenged. Given this difficult backdrop, PJT Parkhill revenues were down significantly in the second quarter.
While we expect second half performance to be materially better, then first half performance.
We expect full year revenues and PJT Park Hill to be down significantly as well.
Turning to Strategic Advisory. Revenues in our Strategic Advisory Business rose modestly in the quarter relative to year ago levels.
and were essentially flat for the six-month period compared to the prior year.
This contrasts favorably with overall year-to-date global M&A activity, which declined significantly year-over-year.
Despite the low levels of MNA activity year to date, the headwinds that have dampened MNA activity
have begun to die down. It remains a matter of when, not if, the market backdrop begins to spark a resurgence in M&A.
We are seeing an improvement in the quality and quantity of our strategic dialogues.
and our mandate count has grown steadily throughout the year.
Notwithstanding this higher level of strategic engagement,
We remain cautious given the challenges in converting mandates into a noun and then completed deals.
Coupled with the continued elongation of deal making timeframes.
We continue to expect our full year strategic advisory revenues to be below 2022 levels.
Now let me talk about towns.
Midway through the year, we've already surpassed last year's number of partners and managing directors hired.
These bankers who have and will join our firm are in areas such as technology, industrials, infrastructure, consumer, and health care.
We intend to recruit actively for the balance of the year and are having promising discussions with a number of potential new partners. We intend to recruit a number of potential new partners.
Given all of this, we fully expect 2023 to be our most consequential hiring year ever.
this we fully expect 2023 to be our most consequential hiring year ever. Looking ahead.
Our firm remains well positioned to navigate what is still a challenging environment on both an absolute and relative basis.
The potential for a number of sizable revenue events to slip into 2024.
Coupled with the difficult macro environment makes us somewhat cautious. Our current expectation is for second-hand revenues to be below last year's second-hand levels, even though our full year 2023 revenues should be above last year's revenues.
We are highly confident in our future growth prospects. We remain steadfast in our commitment to enhance the value of our franchise.
through targeted investment, which spans our capabilities.
Bronze our coverage footprint.
broadens our coverage footprint, furthers our geographic reach.
deepens our client relationship, and enhances our brand recognition.
our client relationship and enhances our brand recognition. We will now take your 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 that your mute function is turned off to allow your signal to reach our equipment.
Again, you may press star one to ask a question.
We'll pause for just a moment to allow everyone an opportunity to signal and we'll take our first question from Devon Ryan with JMP Securities.
Your line is now open, please go ahead.
Now open please go ahead. Great, good morning everyone.
Good morning, good morning, Devon.
Okay, so I guess we'll just start on strategic advisory. Appreciate some of the more near-term, your commentary on revenue. But just thinking about kind of the pipeline and maybe some green shoots that are forming here.
I think going back to last quarter, you talked about the mandate count growing appreciably from the start of the year, and I think it was down about 10% year-to-year as of the time of the last call. And then you'd mentioned discernible uptake in April . So we're, I think, two and a half months from that time period. So I know the revenues take time to kind of build and deal some time to close, but just in turn.
different about this downturn than other downturns.
is the strategic dialogue and the desire to transact, the will has never wavered, and that's different.
in the past. I think it's been more about actionability. And we've talked about this. There's been a whole host of issues. There's regulatory uncertainty and overhang. You have volatility and asset prices and difficulty sort of aligning buyers and sellers.
You have difficulty getting access to a significant quantum of capital for many transactions and the cost of that capital has continued to move higher, which has put transactions increasingly out of reach. And then just fundamentally, there's just been an unease in the lack of confidence and and executability and companies willing this to...
Investigate sales or divestitures in a highly uncertain world means you prep and you get ready But you're not yet ready to pull the trigger
sales or divestitures in a highly uncertain world means you prep and you get ready but you're not yet ready to pull the trigger. All of that in almost every
Level is far improved today.
than it was a month ago or three months ago, and certainly from the beginning of the year. We're seeing it in our strategic engagement and our strategic dialogues. Our mandate can't continue to move higher. It's higher than it was a year ago, but more to the point, the quality and the near term action ability.
is far improved today than it was even three months ago. Having said that,
and I'm cautious about calling the absolute bottom and when we start to see a rush to transaction activity levels. But it's clear that it's building, and as I said, it's simply a matter of when, not if.
And we feel really good about how we're going to be positioned as the world begins to return to a more normal cadence of transaction deal-necking.
Okay, terrific, thanks Paul. Just to follow up here, just normalize margins, obviously come up frequently, and comp's gonna be the biggest swing factor there. And so I think I know the answer here, but just love to just get your thoughts on your parsing through the comp ratio. And if we were to...
Maybe think about something close to 60% is maybe a comparable ratio in a more normal revenue environment and UKT being a more mature platform in the future. Maybe that's where we get to or something slightly better than that.
We're roughly 100,000 basis points above that, at least, through the first half of this year. And so just a little bit to maybe see if we can get some flavor around how much of that delta that we're seeing this year is a function of growth investment that you're talking about in the record recruiting environment and just investing in talent versus.
how much is the function of the environment needing to normalize here, just in a trying to think of orders of magnitude of kind of each piece because those are the two big drivers.
Yeah, look, you can never perfectly match
Investment and the moment when you can deploy that investment to get immediate return.
And if you try and spend your life just matching timing, you'll end up with no investment. And if you try and spend your life just matching timing, you'll end up with no investment.
where you'll end up with poor investment at the wrong time in the cycle. So we've always been very clear.
that a lot of our growth is going to be driven by the fact that this platform attracts best-in-class talent and that we have so much white space and we're going to continue to grow.
At the same time, we have to be mindful of the macro environment. And in 2020 and 2021,
Our ability to recruit candidates the talent that we wanted at our firm was severely impaired for two reasons. One was we had the COVID meltdown.
and everyone went to work remotely, and that is not the environment in which people would be making career moves where we could really vet candidates and where they could see the magic of our platform. And in 2021, when we had this rapid melt up, the friction costs of leaving the existing platform to come join our firm and sit out most
in 20
And we're seeing, you know, the quantum and the quality of the candidate is the best that we have seen in our eight-year history. But the reality is that part of what is creating that is the fact that the switching cost, the friction cost, is at arguably an eight-year low because of the low levels of M&A activity. So we're not able to fully match it up. And if you have two years of significant investment,
And if the investment is going higher, you have this mismatch. And as soon as that normalizes, and I suspect that that is mostly driven by the macro environment, and when we're in a more constructive environment, and when the investment that's been put on the field, and is about to be put on the field, has a little bit of time, we should get this back to where investment and return are more appropriately matched.
investment is going higher, you have this mismatch. And as soon as that normalizes, and I suspect that that is mostly driven by the macro environment, and when we're in a more constructive environment, and when the investment that's been put on the field, and it's about to be put on the field, has a little bit of time, we should get this back to where investment and return are more appropriately matched.
than they can cause companies to back away. So I think we're still trying to figure all this out. I think there are a number of cases still to be tried and we're gonna see where the FTC goes with all of this, but I certainly have a watchful eye on all of this. Having said that, I think you can still have a very robust rebound in M&M.
I'm not sure at the end of the day, where this all leads but I do think that at the end of the day.
Sure.
We'll know the new guide rails, and we'll figure out how to work within.
Those confines, but.
Certainly not helpful to our overall M&A activity, which is another reason why.
I don't think we're necessarily going back to 2021 levels.
Anytime soon but I don't think we need to to have a very healthy marketplace.
No all fair points and at the risk of beating a dead horse here I am going to ask a follow up on recruitment.
The one aspect Paul that I'm struggling to reconcile and this is actually more of like an industry level question.
Oleds bracket peers collectively had been hinting at better M&A indicators as signs of green shoots.
And yet it it's tough to reconcile that messaging with the favorable recruitment backdrop. Just curious why you we havent seen better talent retention in your mind at some of the bulge brackets and for how long do you expect this more favorable recruiting environment to persist.
Look I've said for a long time I think there is a long term trend.
From large diversified financial institutions to more focused advisory firms.
And you see that more and more clients want to move and work with smaller firms that are more focused where they see more alignment and they see higher more consistent levels of talent that is a trend that started a long time ago that is going to continue.
But the reality is it doesn't just work on a straight line there are always.
Interceding factors, which either accelerate some of that pace.
Or are they they tap it down but over time I think.
That's where the direction of travel is and part of it is.
Smaller advisory focused firms have laid out the case over what is now more than a decade.
This business model has real traction with clients and this is where clients want to move and if you're a banker and you're at a large firm and you see that your client is.
Likely to do as much arguably more business with you. If you were on an advisory focused platform only that has to be.
That has to influence the direction of travel longer term now theres always an intervening factor and in a world where.
You know everyone is transactions galore, and you've got a large book of business and that's not the time to leave the field of play for a considerable period of time, that's just going to cause people to pretty much remain in place when people remain in place that is a benefit to an incumbent there.
That is a headwind to a new surgeon like our firm.
When Covid happens and everyone is just focused on the health crisis, and making sure everyone stays safe.
And we're trying to come together as a community that is not the time, where all of a sudden recruiting ramps up. So I just think you need to get rid of all of the back and forth and there are always going to be large firms.
That are capitalizing and feasting off of other large firms and vice versa. So in the world of large integrated diversified financial institutions, Theres always going to be a direction of travel within that ecosystem, but if you look more broadly about it.
Firms to smaller firms I think that the direction of travel is slow and steady and we don't need that many when you look at what we're trying to build and how many individuals were looking to add to our platform versus the size of the overall financial services industry.
Talking about our hiring being a very large component of that enormous pool, but we got the right people and the right culture carriers and the right expertise, we can take what we're building and just take it to another complete step step up so I don't spend as much time focused on the map.
ROE trends almost every conversation I have is a micro.
Conversation, what's as individuals doing their current firm.
What's blocking them for being the best bank or they can be or are they being med toward or they are being trained are they've been given responsibility are they working at a firm where they're being asked to.
So sort of quote unquote sell lots of different products or can they focus on advisory are they obsessed with league tables.
Market share where can they be more relationship oriented it's much more of a micro conversation than talking about what's going on.
And the macro and I also want to be very clear.
You know some of the largest diversified financial institutions have extraordinary track record. They are incredible firms and they can continue to coexist in this ecosystem with firms like ours.
Helpful color, Paul Thanks for taking my questions.
Absolutely. Thank you.
Our next question comes from Jim Mitchell with Seaport Global Securities. Please go ahead.
Hey, good morning.
Maybe just good morning, maybe on the Park Hill business. It seems like the outlook has deteriorated a little bit over the last three months and we can obviously see the placement revenue and activity, but maybe you could broaden that out to the other verticals that we can't really see whether it's secondary or are there other pieces of that business.
What's driving a little bit of the worsening outlook and how do you think about.
The whole thing.
Some of those individual pieces going forward.
Yeah look I think.
This is this is much more a transitory phenomenon, which is.
When all of a sudden you have.
Lps that are not making new allocations are over committed.
Means that funding and fundraising gets pushed out.
Fund raising that doesn't get pushed out it takes longer to close and it means that instead of exceeding your aspirational targets in terms of quantum of dollars.
You are more likely to fall short or just hit the number as opposed to getting past it.
And what we're seeing and you know this more difficult environment is nothing that we didnt expect at the beginning of the year other than.
More things have gotten pushed.
From 2023 into 2024.
Therefore, we kind of have this air pocket, because if youre dealing with a certain cadence.
Between the time you get the mandate at the time you complete a transaction and then all of a sudden in the midst of this for the reasons, we've talked about consistently those processes get elongated.
Means the number of closings in 2023, just keep getting pushed out but I'm quite confident we will get to a.
A very different place it.
It may be over the next six to 12 months, but we will get back to a more normal cadence in a more normal.
The level of activity.
Within all of this I would say that probably the brightest spot of all continues to be you know the whole phenomenon continuation funds.
Secondary transactions because those transactions are designed to address some of the liquidity needs.
Lps, either LP stake sales or they are.
GPS trying to facilitate liquidity for their Lps. So that continues to be a very robust business model we've had.
Success, but that vertical alone cannot carry of the back of the primary fundraising as channels.
Okay, Great. That's helpful. And then maybe just getting back to the comp ratio.
<unk> the long term and near term I don't know if theres a way you can help us think about the intermediate term if a lot of the new hires are joining in the back half.
Haps really productivity as more of a 'twenty four events and then you have the timing of the revenue of that.
Is this something where we not that youre going to give me a number but just thinking about the comp ratio in next year and are recovering advisory environment can we get can you get operating leverage there.
In an improving environment next year or is that is that more of a 'twenty fives type event.
Well I think what Youre seeing here is you're seeing the cumulative investment and declining revenues and strategic advisory because how much. The overall market activity has contracted I don't expect the investment to slow.
Any time soon meaning I have every expectation that this will continue into 2024.
What I do expect is that the business climate.
And activity levels to start to pick up appreciably. So really is what's your crystal ball on when that activity picks up and when that translates not just into announced activity, but closed activity. So my hope is that that starts in 2024.
Okay, great. Thanks.
Absolutely. Thank you Jim.
That was our final question, we will now turn it back to Paul Heldman for his closing remarks.
Well once again I want to thank everyone for their time and their interest in our company. We very much look forward to these conversations and we will be back in three months to report third quarter results I have a wonderful end of summer and speak to you then.
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