Q2 2023 Perella Weinberg Partners Earnings Call

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Good morning, and welcome to the Perella Weinberg partners second quarter 2023 earnings Conference call.

During todays discussion all callers will be placed in a listen only mode and following management's prepared remarks. The conference call will be opened for questions from the research community.

This conference call is being recorded.

At this time I'd like to turn the conference over to pay their Reinhart head of Investor Relations. Please go ahead.

Thank you operator, and welcome to our second quarter 2023 earnings call. Joining me today are Andrew Burton, our Chief Executive Officer, and Gary Brandt, Chief Financial Officer.

A replay of this call will be available through the investors page on the company's website approximately two hours. Following the conclusion of this live broadcast.

August 10, 2023 for those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today August 320, 23 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 PW piece expect.

Patients are future financial and business performance and conditions and industry outlook forward looking statements are inherently subject to risks uncertainties and assumptions that 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 PW piece, 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 and the firm undertakes no obligation to update any forward looking statement.

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 P. W. P 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 Companys website I will now turn.

The call over to Andrew Gardiner to discuss our results.

Thank you Taylor and good morning.

Today, we reported second quarter revenues of $166 million up 10% from a year ago and up 26% from the prior quarter.

Our first half revenues of $297 million were essentially flat year over year.

Even as global M&A market volumes continued to decline year over year.

Our above market performance speaks to the strength of our brand and our client relationships the quality and tenacity of our team.

And the continued effective positioning of our firm's resources.

In the second quarter, our results were driven by strong relative performance in our traditional M&A business with activity spread across our key industries.

Our revenue increase reflected more absolute transaction completions as well as more transactions with larger fees.

The market environment remains challenging.

The conditions have improved.

We see encouraging signs of activity across our business and we are increasingly optimistic that the trough in activity is behind us.

Our key indicator to afford volume, our announced and pending backlog has steadily increased year over year and year to date.

We expect revenue related to this activity will lag as nearly all aspects of the transaction time lines continued to be elongated relative to historical norms. Nevertheless, after nearly 18 months of sobering data points, we do see signs of a churning M&A cycle.

Our financing and capital solutions business is increasingly active as we see opportunities to place in structured private debt and equity solutions for our clients and what has been a prolonged period of uncertainty of access to capital and increasing cost of capital.

Structuring has continued to gain momentum in the year, both in the U S and Europe with mandates driven by strong liability management activity, including new financings maturity extensions in that exchange is designed to address 'twenty 'twenty, four and 'twenty 'twenty five maturity walls.

And what is expected to be a higher for longer rate environment and given the surge in private credit, we anticipate a higher baseline of financing and capital solutions activity through the next M&A cycle.

We continue to invest in scaling our franchise and make selective senior hires to enhance our client footprint and product offering.

Year to date, we have added four advisory partners and eight managing directors with an additional two partners committed to join in the third quarter.

Our new hires bring expertise and strategically active sectors, including technology business and consumer services aerospace and defense and stakeholder activism.

We have been in a mode of above market talent growth since the lead up to our public listing with consistently 25% to 30% of our partners in their seat.

Less than three years. These partners are not yet at full productivity and represent a built in source of revenue growth in the years ahead.

We are confident that our steady investment in talent without lowering our Hyatt mission standards will prove to be highly accretive to our stakeholders overtime.

Our financial results for the first half, but positioned us very well to execute on our strategic and financial goals for this year and beyond.

Thank you to our clients and to our teams globally for their commitment and dedication to our firm and to our mission.

Before I turn the call over to Gary I, just wanted to acknowledge our announcement in todays earnings release that Gary will be stepping down from his position as CFO at the end of the year.

We have been so fortunate to have Gary with us since our founding over 17 years ago with his many contributions so integral to the firm's growth and development, including our transition from a private partnership to a public company.

Given that Gary will remain in his position until the end of the year to ensure a smooth transition I'm sure. We will both have more to say on this topic on november's call, but for now I just want to say thank you Gary for your partnership and for your dedication to the firm since day one.

And also I'll finish by saying congratulations to Alex Gottschalk currently our Chief Accounting Officer, who will become CFO January one.

We look forward to working with her and wish her success in her new role.

Over to you.

Thank you Andrew I just wanted to note that it's been an honor and a privilege to have been at Pwc advisory partner since the firm's founding in 2006 and she served as CFO . Since 2018, I worked very closely with Alex over the past five years I can attest to the fact that she's an exceptional talent is well positioned to guide the firm as its next year.

Oh.

Turning to our results as Andrew already spoke to topline performance in his remarks I'll begin with review of our expenses.

We accrued adjusted compensation expense at 69% of revenues in the second quarter.

This resulted in a blended accrual of 67% in the first half a level that reflected our expectations at the end of the second quarter for a full year margin at.

The decision to increase our compensation margin was dictated by a few factors, including the revenue environment.

<unk> talent and relative industry compensation levels as we progress through the year, we will continue to assess the appropriateness of this estimate.

Our adjusted non compensation expense was $36 million for the second quarter and $71 million for the first half.

Non compensation spend grew 12% in the first half compared to the same period last year, largely the result of expenses, which will enhance our brands and help drive revenue, including those related to our new offices in New York, and London and increased G&A expense.

Our expectation remains a full year of 2023, adjusted non comp expense will come in 15% to 20% higher than 2022, largely result of infrastructure investment to support our next phase of growth.

In future periods, we expect our non comp growth rate to moderate without the impact of onetime expenditures such as overlapping rent, which is projected to account for approximately $4 $5 million of non comp expense in 2023.

Our adjusted if converted effective tax rate for the first half of 2023 was 22% which includes a tax benefit recognized in the second quarter, which will not recur in the second half of the year.

And we therefore currently expect that our effective tax rate for the full year should be close to last year's 28%.

Year to date, we've returned a total of $47 million to investors through repurchases net settlement and Louis share issuances common stock dividends and pro rata distributions.

Looking forward, we will continue to return capital to shareholders through dividends and repurchases, although the cadence of repurchases will vary from quarter to quarter and will be dependent on the operating environment and our business needs at such time.

On the balance sheet, we ended the quarter with $180 million in cash and short term investments and no debt.

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 would.

I'd like to ask a question. Please press star one on your telephone keypad.

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

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

Hey, great good morning.

Andrew Gary Gary it's been a pleasure.

Best wishes and I guess, we'll have another quarter with you, but just really appreciate the time together here.

First question.

One just wanted to touch on that thanks, Gary I wanted to touch on the financing and capital solutions. So the revenues were roughly flat in the quarter year over year, I think is actually down a little bit year over year yet.

You guys talked about kind of the growing activity. There, we're tracking kind of a growing backlog in those businesses as well from the outside and so maybe just talk about how you see that acceleration in backlog showing up in the results is not at the back half of this year is that 2024, and just kind of orders of magnitude of how much better.

Activities there thanks.

When you look back at the quarter and really the first half.

Very well balanced.

Business across our platform, whether you look at it by industry or products or geographies. So we're just really pleased with the with the results. There is nothing that's one off or anything anomalous in so it sets us well I think it sets us up for growth very well going forward.

Looking at the mix when you look at just the comparison back to <unk>.

2022, we did have one revenue event in 2022, which was outsized and.

That makes for the comparison, which puts our revenue in the financing and capital solutions Arena about flat and again most of our growth here in the quarter is coming from traditional M&A, but as I said, we we like the balance of the business right now in the mix I think it has a strong foundation from which we can grow we don't really.

Quarter by quarter or even year by year when that revenue is going to hit but we like the early indications that the activity levels historically that type of activity it can be.

More recent and hitting revenue versus the M&A cycle.

Again, we don't we don't really predict it by quarter or by year.

Okay.

Okay perfect.

If you can just elaborate a little bit more on some of the green sheets.

Track are alluding to.

Where youre seeing some of that increased activity is it broad based or is it.

Like sectors and then.

Just also there's also a pwc story in here you guys have a higher number of bankers that are kind of ramping on the platform that had been on the platform for less than two or three years. So just love to kind of talk about also maybe some idiosyncratic growth that youre seeing maybe it's just bankers maturing in connecting with clients and there is more business coming through more recently added talent.

Thanks.

Yeah, Devin so as you well know given our scale, we tend to be less tethered to the global M&A volumes and so we will from time to time, we will have outsized growth relative to what's happening in the broader market and I think we can continue to do that.

Basic materials in and around technology, So those have been.

Good investments that we made where we're very pleased with our very steady investment in that type of talent.

Generally the activity and even though revenue always lags and certainly it's very hard to predict again quarter by quarter year over year with activity converting to revenue.

That's always a quite challenging, especially in what is an elongation cycle here for M&A things to start taking longer I think we're finding that most managements.

Boards are just saying that there's going to be a time here, where they have to stop thinking about when conditions will improve and start accepting that current conditions might be here for a while and setting a plan forward and I think we're starting to see that type of thinking change and that's been good for the increase in activity.

<unk>, which again is happening across the platform.

Yeah.

Okay, that's great color I'll leave it there thanks.

Yes.

Thank you.

Hey, good morning, and thanks for taking my questions.

From your peers has been quite different maybe you could just speak to the trends that you're seeing in your business and maybe differentiate between chapter 11 versus our liability management.

Yeah, I think some of our peers may have had some extraordinary events.

It's certainly reported on and those are you know.

Well documented I think for our business and in this particular quarter. We didn't have those type of extraordinary events, but we have I think a very steady and growing increase in activity across our financing and capital solutions business as I mentioned on the.

Prior set of questions. My answers there was there a revenue event in 'twenty two that was.

It was outsized that makes for a bit more challenging comparison.

For the current quarter.

Going forward.

Seeing pretty broad activity around liability management and in our financing advisory business.

I'd say that people have reported on the uptick in bankruptcies I don't I don't think we see a significant uptick though there are some that are very well documented and well publicized I think it's more about.

Companies, realizing that it's a more challenging.

Market with respect to accessing capital and certainly a more challenging market with respect to cost of capital you have the advent and the increase in.

The private credit markets.

So we're seeing.

A request for a balance sheet management for complex stories, where people need help in thinking through maturities a lot of which is coming in 'twenty four 'twenty five so I think some of that revenue always lags and we look at the early indicators for what we see as positive trends and we're seeing positive trends in that market both across <unk>.

Europe as well as the United States, where as you know in Europe , we've made significant investments in our team and feel very good about our positioning there.

Okay, that's very clear thank you for that.

Just wanted to touch on the comp ratio both in the near term and the longer term you've talked about additional hires coming out of the platform.

Could that result in additional near term upward pressure on the comp ratio in 2023, and then maybe just.

It would be good to get your thoughts on over what time period do you think the comp ratio could normalize back to that 64, 65% range that you put up in recent quarters.

Yes, so I think we're still within par parameters in the guidance, we put out when we had our public listing that we'd be around the mid sixties.

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Precise in the statement, but that statement provides for a little bit of flexibility downside and upside I think we're still within the bands.

Had an operating environment, where I think it warrants a bit of an uptick in <unk>.

And the comp margin Gerry has highlighted the reasons for that and.

I think we've always been quite disciplined and very steady and how we think about hiring and so even though it is a much more favorable recruiting environment in terms of the numbers.

The people that are interested in and changing.

Their employers were still maintaining very very high standards for joining the firm.

And so I think you always have a challenge culturally and financially with that type of growth that goes beyond our steady growth of talent. So we will continue to be steady. We we don't see any gap up again and hiring we're going to continue to be steady.

So that we can stay within our bounds in terms of the comp ratio.

And also not require our current productive bankers to overinvest in pin growth. So we're we're pretty we're pretty disciplined there III deliberate right now as Gary said in the opening remarks, we.

I believe that we're at a level that.

As our current expectation of where we'll end the year, but conditions can change and we watch it very closely and as I've said in prior calls, we're always going to invest behind our team it'd be foolish not to.

And so hopefully we are in an environment, where we don't need to move the comp ratio, but right now reflects our best view and and that's at the 67 level, which is where we ended up in the first half.

Okay, that's very clear thanks, a lot and thanks, a lot Gerry for all of your help over the past few years and all the best.

Thank you Dan.

And we'll take our next question from Steven <unk> with Wolfe Research. Your line is open.

Good morning. This is Brendan O'brien filling in for Stephen So I wanted to follow up on the comp question in the release you indicated that youre undertaking some actions on the expense side I was hoping you can provide more color on.

What the aims of the business realignment initiative and what type of actions, we should expect you to take a.

And going forward.

Yes, Thanks, our actions were.

To really optimize our allocation of capital and less about reducing the overall expense base and so we took a really close look at where we had resources both geographically as well as.

Industry and product perspective.

Our focus is around making sure that we have the right.

Our team on the ground in the right place and where we can win and so we've decided to make some changes across our platform and.

We will redeploy that capital towards investment and toward making sure that.

We are positioning new resources in places, where we see growth and where we see opportunity. So it's not about taking cost out of the system.

To get to a better earnings result, and I don't think of it as cost cutting I think of it as capital allocation and where we're putting our resources. So that we can better position the firm for growth.

I guess for my follow up I wanted to discuss Europe central banks in Europe are behind the fed in terms of where they are in the rate hike cycle and we've seen an ABN price certainty on the path of rates has impacted activity in the U S.

The bank of England, and ECP or probably a step or two behind but I think people are.

Pretty well modeling and the expected terminal rates. There. So absence surprise I think people have adjusted to what are likely to be conditions that persist for some time and this concept of higher rates for longer.

Believe will be the conditions in the United States as well as across Europe .

I'd states in terms of converting to revenue.

But we are seeing increased activity across our European platform, which is similar.

To the United States. So in terms of the early indicators there. They are quite similar in spite of macro and central bank activity potentially being a little bit behind.

Alright, Thank you for taking my questions.

This concludes the Q&A portion of today's call I would now like to turn the call back over to Andrew <unk> for additional or closing remarks.

Okay. Thank you operator, thank you everyone for joining and for your interest in our firm and of course for your support and we look forward to talking to you in November . Thank you.

This concludes the Perella Weinberg partners second quarter 2023 earnings call and webcast. You may disconnect. Your lines at this time and have a wonderful day.

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