PJT Partners Inc (PJT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PJT Partners fourth-quarter and full-year 2015 earnings call. My name is Joyce, and I will be the operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to the call over to your host for today, Sharon Pearson, Head of Investor Relations. Please proceed.

Thanks very much Joyce. Good morning and welcome to the PJT Partners fourth-quarter and full-year 2015 earnings conference call. Joining me today is Paul Taubman, our Chairman and Chief Executive Officer; Ji-Yeun Lee, our Managing Partner; and Helen Meates, 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 take 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 of the information statement contained in PJT Partners' form 10 registration statements as filed with the Securities and Exchange Commission on September 2, 2015, which is available on our website at www.PJTpartners.com. I want to remind you that the Company assumes no duty to update any forward-looking statements.

Also, the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the Company's performance. 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 will turn the call over to Paul.

Good morning, thanks for joining us today. We will now discuss our first quarterly results as a publicly traded company.

As we have consistently said, we are in the process of creating a world-class firm built for the long term. While we are committed to making progress towards that goal each and every day, we believe our financial progress is best measured in years, not in quarters. To that end, we are very pleased with all that we've accomplished in calendar year 2015.

In a relatively short period of time, we combined two separate firms and created one cohesive enterprise. This quarter marks the culmination of a highly successful transition from October 2014, when the merger and spinoff from Blackstone was first announced, through the end of 2015, when we closed the books on our first quarter as an independent public company.

We began this journey committed to taking the bold steps necessary to position ourselves as a leading franchise for the future. Notwithstanding the disruption we knew these actions would cause to the business, our stated financial goal was to transition to 2016 with a revenue base at least as strong as the prior year. We accomplished our objectives by ending the year a substantially stronger firm and with the revenues up year over year.

On our last earnings call, we talked about the excitement, the energy and the enthusiasm our colleagues feel as they create a premier advisory-focused investment bank. In that vein, we have made tangible progress towards building a cohesive culture and integrating our three businesses. This has come together more quickly than we ever expected.

We see progress with each passing day and expect the picture to become increasingly clear to our stakeholders. Given where we sit today, we're more confident in our near-, intermediate- and long-term prospects than when we last spoke to all of you.

We have made great progress as we capitalized on our significantly expanded addressable market now that we are completely independent from Blackstone. As we materially increase the breadth and depth of our advisory franchise, as we enhance collaboration amongst our three businesses to better serve our clients and drive growth, and as we become the premier destination for best-in-class talent.

In terms of capitalizing on our expanded addressable market, we are engaged in advisory dialogues with a broad range of financial sponsors and corporate clients that simply would not have occurred under the prior structure. Our restructuring group, for example, is currently involved in a number of significant engagements that would have been off-limits to us because of the conflicts inherent in the old structure. Firm wide, these dialogues have resulted in current mandates as well as a robust pipeline of opportunities.

An important part of our growth strategy has been leveraging the power of our three businesses through increased collaboration to better serve our clients. Since the spinoff, we've entered into numerous joint engagements involving advisory and restructuring. In addition, there have been frequent client introductions across groups on potential corporate private placements as well as fund placements.

2015 highlights in restructuring include advising on more than 70 mandates globally, representing over $230 billion in dollar volume, advising on seven of the 10 largest restructurings in 2015. Our notable assignments included Walter Energy, Arch Coal, Samson and Caesars, Ukraine and MBIA in Puerto Rico.

In our advisory business, notable announced transactions including advising Cablevision on its announced sale to Altice for $18 billion. Advising Catamaran on its $14 billion sale to United Health Group, advising Rock-Tenn on its $21 billion merger with MeadWestvaco and advising young Brands on its separation into two independent publicly traded companies.

With respect to Park Hill, in 2015, we raised more capital than any other fund placement agent according to external sources. Our deal flow remains strong across all regions and asset classes as a result of our global reach as well as the breadth and depth of our relationships.

Throughout 2015, we focused our recruiting best-in-class talent, particularly in our strategic advisory business. Our recruiting momentum in 2015 has continued into 2016. It is clear that our differentiated platform and value proposition are resonating not only with the most senior bankers, but also on campuses.

Before I turn it over to Helen to review our financial results, I want to share our view of capital deployment and how it relates to our 2015 compensation structure. Our highest return will come from the continued investment in our people and the talent we attract to PJT. Accordingly, investment in human capital remains our first priority.

A close second is managing share dilution, particularly given our belief that our equity is significantly undervalued relative to our prospects. Consistent with this belief, when presented with the opportunity in the fourth quarter of last year to purchase shares, the vast majority of our partners collectively chose to buy nearly $30 million worth of our stock in a block transaction.

With that frame of reference, we decided to significantly reduce the amount of equity compensation awarded to our partners for 2015. This accomplished two things. It enabled us to increase our partners' investment in the firm without any corresponding dilution. Our current intent is to return to a more typical deferral schedule for 2016.

With that, I will turn it over to Helen to review our reported results. I will then close with our outlook for 2016 and beyond.

Thank you, Paul. Good morning. Before I discuss the results for the quarter and the full year, I want to provide you with some context for the numbers we reported today. With the merger and spin transaction completed at the end of the third quarter, the full-year results include the fourth-quarter results for the combined business of PJT Capital and the legacy Blackstone advisory business and the first nine months results of just the legacy Blackstone business.

As previously mentioned, we treated partner compensation differently this year by reducing the amount of deferred equity that was awarded, which I will discuss in more detail. And the non-comp expense includes a number of one-time costs associated with the transaction, the majority of which were incurred in the third quarter.

So with that context, I would make a few observations. First, given this was a transition year, the full revenue-generating capability of the people and the building today is not reflected in the 2015 revenues.

Second, making some pro forma adjustments to compensation to provide a more apples to apples comparison results in a compensation ratio in 2015 which is in line with the historical levels. And finally, with the one-time non-compensation costs now behind us, we have an attractive cost base from which to scale our business.

So with that background, I'm beginning with revenues. Total revenues for the year were up slightly, $406 million in 2015 compared with $401 million in 2014. And the breakdown of revenues, advisory revenues for the full year were $286 million compared with $271 million for 2014, up 5% year over year. The year-over-year increase was driven primarily by increased M&A fees with a number of large transactions closing in the third quarter.

Placement revenues for the full year were $114 million compared with $128 million for 2014, down 11% year over year. And while funds placement fees were up slightly year over year, a decrease in corporate private placement fees resulted in a decline in placement revenue overall. And consistent with our prior guidance, total revenues in the fourth quarter were down versus 2014, $104 million in 2015 compared with $149 million, down 30% versus a very strong fourth quarter of 2014.

Advisory revenues in the fourth quarter were $65 million compared with $88 million the prior year. The decrease in advisory revenue was primarily due to reduced M&A fees in the period.

Total placement revenues in the fourth quarter were $38 million compared with $60 million the prior year. The decrease was a result of both lower fund placement fees and as a number of closings slipped to 2016 and lower private placement fees.

Turning now to expenses, we have presented the expenses with a number of non-GAAP adjustments. These adjustments relate to amortization of equity awards and intangible assets associated with the Blackstone IPO in 2007 and in the fourth quarter, the amortization of equity awards and intangible assets associated with the merger with PJT Capital and subsequent spinoff from Blackstone. And you can refer to our press release for more details on the reconciliation of these adjustments to GAAP results.

Our first adjusted compensation. I will review how we structure compensation this year, which had an impact on how it was expensed. As Paul mentioned, we made the decision that for 2015, the portion of partner above-base compensation that would normally be paid in deferred equity would be paid in cash.

We imposed clawback restrictions on the cash awards, which were similar to those of the deferred equity awards. However, from an accounting perspective, we are required to expense the entire compensation award in 2015, and this change resulted in increased compensation expense in 2015. For the full year, adjusted compensation expense was $278 million or 69% of revenues compared with $226 million or 56% of revenues in 2014.

And there are two primary factors which contribute to the year-over-year increase in compensation expense. For 2014, Blackstone changed its equity deferral plan, which lowered the compensation expense and resulted in the compensation ratio of 56%. Had that policy been in place in prior years as well, the compensation ratio would have been approximately 63%.

For 2015, if you make that same adjustment and also assume we had maintained the 2014 equity deferral policy, our adjusted compensation ratio in 2015 would have been approximately 63% as well. And as Paul said earlier, we intend to return to a more typical equity deferral schedule in 2016.

I'm turning to non-compensation expense. Total adjusted non-compensation expense was $86 million compared with $73 million in 2014, and the majority of the year-over-year increase was reflected in the third quarter and represents a number of one-time costs relating to the merger and subsequent spend. And those costs are in three main areas: a duplicate rent in New York, London and Hong Kong while we built out our new space, increased legal and audit fees and additional cost relating to the buildout of our systems and our infrastructure.

For the fourth quarter, total adjusted non-compensation expense was $21 million, roughly flat with the prior year. We expect our non-compensation expense for 2016 to track lower than the fourth-quarter 2015 run rate.

Turning to pre-tax income, we reported adjusted pre-tax income of $42 million in 2015 compared with $102 million in 2014, and the pre-tax margin for the full year was 10% in 2015 compared to 25% in 2014. Adjusting for the 63% comp ratio that I just referred to and for the one-time expenses associated with the transaction, the resulting adjusted pre-tax margin would have been around 19% for both 2014 and 2015.

On taxes, the provision for tax reflects the fact that the Company was taxed as a partnership for the first nine months of the year and taxed as a corporation in the fourth quarter. Going forward, we will have the benefit of a $69 million deferred tax asset, $57 million of which will be 100% for the benefit of the C-Corp, and we will provide more detail on our tax expense in the 10-K.

On the share count, at the end of th earnings release, we have provided a summary of our share count, which includes a breakdown of the share components. Our fully diluted share count using the treasury stock method is [55.4] million shares.

On the balance sheet, I would highlight two items related to the Stone transaction. I mentioned the deferred tax asset of $69 million, of which $57 million relates to past exchanges of Blackstone holdings units into Blackstone common units.

Again, this asset is 100% for the benefit the public company, and it's a amortized over a weighted average period of approximately 10 years. And the acquisition of PJT Capital resulted in the booking of $15 million in incremental intangible assets and $7 million in incremental goodwill.

In addition, we ended the year with net working capital of approximately $90 million and no funded debt. Finally, the Board has approved a dividend of $0.05 per share. The dividend is payable on March 23 to shareholders of record on March 9. I will now turn it back to Paul.

Thank you, Helen. As we begin our first full year as a new enterprise, we could not be more pleased with all that we have accomplished and the opportunities ahead. In each business, we are seeing strong momentum and are well-positioned to capitalize on the current environment.

Our leading restructuring business is only just beginning to realize the benefits of the unshackling as well as the closer alignment with our other businesses. Given the current market environment, our backlog is the strongest it has been since the financial crisis.

Since we spun on October 1, our active restructuring assignments are up more than 25%. While we are quite active in the energy and commodity driven sectors, our group has been retained across a broad range of situations spanning many industries and geographies. As a result, we expect 2016 restructuring revenues to be up substantially.

Park Hill, the leading fund placement and secondary advisory business, is also seeing early evidence of the synergies with our other businesses. Park Hill's global scale, depth of expertise in each asset class, and deep long-standing investor relationships position it to deliver higher revenues in 2016.

Our advisory business has been dramatically transformed with more than half of our partners having joined our firm within the last year. That combined with the lead times for client dialogues to evolve into mandates and then announcements and then completions will result in a lag between the positive trajectory we see and the pace with which it translates into revenues. As such, it is difficult to predict the level of financial contribution from advisory in 2016.

Nevertheless, we are confident in our firm's overall growth prospects for 2016. We have consistently talked about the benefits of having three leading, balanced and complementary businesses. This is particularly true given the current market volatility and uncertainty regarding the sustainability of the pace of M&A.

Our opportunities for market share gains are such that we can grow our revenues even if the overall M&A market contracts. In fact, we may be one firm that can grow in any market.

Thank you, and with that, we will take your questions.

(Operator Instructions)

Devin Ryan, JMP Securities.

Great, thanks, good morning.

Good morning.

Maybe just starting on the opportunity to add talent, because it sounds like the momentum there is strong, maybe improving in this market backdrop. And coupling that with the commentary that you guys view the business over years, not quarters.

So from the outside, is there a way for us to think about is there an operating margin that you don't want to move below or just the way you think about managing the business, because obviously if there's a great opportunity to recruit, it sounds like you will take advantage of that. But at the same time, we're just trying to think about how much drag on the near-term you'd be willing to sacrifice to get that long-term earnings power.

Well I think, Devin, we're very focused on building a franchise that has sustainability and durability and is truly a world-class firm. And in order to do that, you have to think like owners and you have to think long term. And we tried with all of our actions to date to think that way.

And with respect to talent, I would expect that in the early years, you would see more and more additions to our firm until we feel that we've gotten into a place where we have we have filled most of the opportunities set that we see in front of us. We don't think it's wise to have quotas. We think you end up either holding back when there is more talent that can be attracted to your platform or you end up just trying to check boxes and add individuals because you'd committed to hire so many folks.

So by definition it will be lumpy, but we will always be thinking as long-term stewards of the firm and how we can make sure that by adding these individuals that are consistent with the culture of the firm that they think about the opportunities in a similar mindset, that they're true difference makers and can help us significantly expand our capabilities. And by doing that, we think it will be very obvious that these hires will be additive to the overall financial enterprise.

Got it, helpful color, thank you. And also appreciate the detail on the restructuring platform right now and the perspective of where that business is. Can you help us think about how much currently is being driven by the commodities complex? I suspect that's a large portion, but I'm curious if there's signs of stress you are seeing activity outside of that.

And then just anything you can provide around anecdotes of how much you would attribute the momentum to unlocking the business from Blackstone, because clearly you highlighted that. But just curious if there's anything you can point to to say these are assignments that we otherwise would not have been on or also things that were on because of maybe our longstanding relationship with Blackstone.

Sure. Let take that in the order in which you presented it. We have a very diversified and broad range of restructuring capabilities. We're doing business with restructuring clients in 20 or more countries around the globe; a very broad base of industries.

While energy is a very important part of that mix right now, it is by no means the preponderance of the business that we're doing. Clearly at the margin, the incremental assignments that we're seeing are much more heavily skewed towards commodity-based sectors than elsewhere. But there's no doubt that as credit becomes less and less available, you're going to see more companies struggle, and it will by definition roil other sectors in other parts of the globe.

But I want you to appreciate how broad-based our practice is today. And how much we can point directly to the Blackstone independence, I think some of that's going to take time. Some of it is very near-term.

I think in the near term, when you had a constant battle as to whether or not to be an investor and capitalize on the situation by investing capital, and that was the principal objective of Blackstone, or to be an advisor, that dance no longer occurs. And therefore our ability to clear conflicts -- there are no conflicts to clear because we are an independent firm and we're in the advice business and only the advice business. So those effects you start to see almost immediately.

With respect to the openness of a broader base of financial sponsors, to deal with us, we've seen a truly instantaneous change in the way in which our firm is perceived. But just because there is a change in perception doesn't mean that the next day that translates into a new mandate. So I suggest to you that part will take some time, and each quarter you will start to see more of the financial results from the change in perception which is mostly complete.

Okay, got it, thanks. And then just maybe one on the Park Hill business, trying to think about how that business performs or will perform in a turbulent market backdrop. To the extent there is significant volatility and that persists, is it similar to M&A mandates where you see a little bit of a pause? Is there a lag? Just trying to think about some of the puts and takes for that business if market stress remains high and how volatile that revenue stream could be.

I think the way we think about is you have to break it down into each of the verticals. If you look at private equity, the fact is that's a very, very long-term investment and asset allocation decision. And that tends to be much less affected by short-term volatility in the market. And I'd point out that in 2015, there was a record level of distributions from private equity funds back to investors. So there's an awful lot of capital that is likely to be redeployed, and that should be a positive macro trend that we hope to capitalize on.

In the hedge fund world, there's no doubt that with all this volatility, you're seeing either a slowing of net inflows or outright outflows. But what that does is it creates more of a flight to quality. And because the Park Hill filter has been a very tight filter and because they've been very, very focused on only taking to market best in breed managers, I think in a world where there is going to be a more discerning investor universe, we're better served in that market.

And then finally there's a long-term move which is a secular positive towards more liquidity in the secondaries market. And if you see meaningful changes in asset values, that will probably cause fund managers to rebalance. So there's no doubt that at some point, if the volatility is extreme, it does affect business. It can't not have that effect, but with a reasonably wide berth, I think we're reasonably insulated from it.

Great, very helpful. That's it for me. Thanks, Paul.

Douglas Sipkin, Susquehanna.

Yes, thank you and good morning, everyone. So just a couple of questions. First for Paul, I will take a shot at it. Any color around how big restructuring related was in 2015? Just trying to gauge how to think about the revenue profile for 2016.

I mean look, when we started this exercise, Blackstone made the comment that these were three approximately equal sized businesses. We're 15 months or so past that. While some of these businesses have moved one way or the other, it's not a very off direction for you.

Okay. Fair enough. And then question for Helen, just trying to wrap my arms around how to think about the adjusted comp ratio for 2016 and beyond. Obviously some of this depends on revenues, and I appreciate the disclosure you guys provided in the quarter around that stuff.

But how should we be thinking about that, the adjusted comp ratio in the context of I guess the cash payment that you guys made in the fourth quarter? And I know you provided historicals around that, but moving into 2016 with that cash award, how should we frame up the 2016 expectation I guess based on your guys' assumption that you will have some revenue growth?

As I mentioned, the pro forma adjustments we provided to get to that 63% are more indicative of historical comparisons. And there are a number of factors that will impact the ratio going forward as -- you're correct, the cash payment in 2015 as well as our expectation that we're going to get greater revenue productivity in the business would cause the ratio to go down in 2016. But we also expect to continue to hire senior talent, and that's going to cause the ratio to go higher. So how those two forces interplay will impact how quickly the comp ratio goes down. So we're not providing any specific guidance in 2016 of exactly what that ratio would be.

Got you, okay. But at least we have a framework. I guess you said 63%, then it could go down from certain things and it can go up from certain things I guess, right?

That's right.

Okay, perfect. And then a question maybe on Park Hill and specifically the secondaries business. How, if at all, does that get impacted by this volatility in the markets? I can appreciate the legacy Park Hill business and the reputation, but the secondary business it's a little bit -- it's a newer business for just the markets in general. Can that hang in there when the markets are this volatile?

And the a follow-up on top of that, are you seeing -- I know there's been a lot of discussion about sovereign wealth funds, maybe having to sell public stock. I just thought it was interesting because I know a lot of them have invested in private equity, and that's not as liquid so their liquidity would come from a Park Hill or some of the other players in the secondaries business. So maybe frame up those two dynamics as we think about that business because I feel like that's probably the better growth opportunity for Park Hill.

Yes, I think with respect to Park Hill, the growth opportunities are in many different directions. A lot of it is the ability to take all of their relationships and create a gateway for our advisory and restructuring bankers. And there's a lot of cross collaboration and initiatives that are underway, and we expect to see a lot more business with a smaller footprint of front-line bankers because of this incredible infrastructure that's been built up over the years at Park Hill. So that's one source of growth that we see which may not necessarily show up in placement revenues. But it's clearly additive for the firm overall, so that's the first point.

I think the second is as we build out our own corporate private placement capabilities, being able to tap into all the institutional pools of capital that Park Hill already touches enables us to be in the market more quickly and to have a truly differentiated, more global offering than others. So there's lots of ways in which we see growth manifesting itself in the overall business, but it may not necessarily show in any one piece, which is why we continue to talk about these businesses on a more integrated basis. And we haven't even touched all of the ways in which restructuring and advisory will play off of each other as the advisory footprint continues to expand.

With respect to where the pools of capital are coming, there's no doubt that in certain parts of the world there may be less appetite to put capital to work. At the same time I made reference a couple of moments ago to the near record level of distributions that have come out of these private equity funds that need to be plowed back in. So we don't see it affecting our business.

And on the secondary side, there's some long-term trends here. Clearly LPs are increasingly looking for more liquidity. And to the extent there's major shocks in the marketplace, there probably will need to be some aggressive reallocation of their existing funds that are allocated.

So within a reasonably broad range of market environments, I think we're very well-positioned. But no doubt if we end up with a precipitous drop, a very, very different market environment, I don't think there's anyone who's going to come out of that unscathed.

Got you. And then just a modeling question as I think about the tax rate for 2016 and beyond, is 40%-ish the right ratio to think about?

We've reported one quarter as a public company, and during that quarter generated a tax loss that we will carry forward into 2016. I think at this point, we're not going to provide any specific guidance on the expected tax rate for 2016, but that's certainly a reasonable starting point. We do have the deferred tax asset as well.

Terrific, thanks so much.

I must say it's a lot more fun to do this call and actually have some questions and have some dialogue, so thank you for that. And we look forward to speaking with all of you on our next earnings call.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.