PJT Partners Inc (PJT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PJT Partners Third Quarter 2016 Earnings Conference Call. My name is Tracy, and I will be your operator for today. At this time, all participants are in listen-only mode and later, we will conduct a Q&A session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Sharon Pearson, Head of Investor Relations. Please proceed.

Thanks very much, Tracy, and good morning, everyone and welcome to the PJT Partners third 2016 earnings conference call. Joining me today is Paul Taubman, our Chairman and Chief Executive Officer 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 make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that these factors are described in the Risk Factors of our 2015 Form 10-K and subsequent filings we make with the SEC, which are 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 and 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, also available on our website.

And with that, I will turn the call over to Paul.

Thank you, Sharon. Good morning, everyone and thank you for joining. In other words, three quarters of the way through our first calendar year as a public company, we're able to provide more clarity on the progress we are making against the goals we set for ourselves. At the outset, we committed to do the following; to reposition our Strategic Advisory business, while benefiting from the strength of our leading Restructuring and Park Hill businesses, to unleash the full potential of the Restructuring and Park Hill businesses through the separation from Blackstone and to integrate and leverage the power of these three complementary businesses to better serve clients through collaboration.

All the steps we have taken to build a stronger, more powerful, more client-focused business were undoubtedly taking hold and we are pleased with the significant momentum in our business. Our leading restructuring business continues to win and execute a large array of assignments around the globe. This quarter, our restructuring business generated significant sequential and year-over-year revenue growth due to an increase in the number of completed assignments. Successfully completed assignments include restructuring advisory roles for Verso, Halcon Resources, Noranda and GOL Airlines. While the pace of new restructuring mandates has moderated in line with the recovery and commodity prices, activity levels remain high and our restructuring backlog continues to be very strong for the remainder of 2016 and beyond.

Turning to Park Hill. Park Hill is on track to produce another solid year. First, in our secondary advisory business, we continue to see great recovery. This past quarter, we won several new assignments and benefited from a number of secondary closings, including the landmark Temasek transaction.

Last month we added a partner to Park Hill focusing on secondary advisory. This will enable us to expand this franchise by capitalizing on the many growth opportunities we see across GP recapitalizations, portfolio sales and securitizations. Overall, the fund placement business in Park Hill continues to perform well, although the marketplace for hedge fund capital raising is clearly challenging. Perhaps counterintuitively, Park Hill is benefiting from this more difficult environment as new and existing hedge fund clients seek them out for their global network and specialist expertise.

Park Hill will be a driver of growth for the firm by maximizing the power of our three businesses through collaboration. We continue to find new ways for Park Hill to work with both the Advisory and Restructuring businesses to better serve clients. Examples include, expanding our private placement distribution through Park Hill LP relationships, particularly in Asia; Leveraging our real estate expertise in Park Hill to provide insights and connectivity to our real estate advisory clients, providing secondary advisory capabilities to those clients with significant PE and hedge fund interests.

Turning to Strategic Advisory. We have consistently said that 2016 will be a transition year for Strategic Advisory. In the M&A business, it takes time for client dialogs to convert to mandates and ultimately revenues. The momentum that we see in the business today will become increasingly evident in future quarters. We measure our progress in Strategic Advisory on client engagement, the quality of our transactions and the strength of our backlog.

We are gaining considerable traction with clients. Our pipeline continues to grow every quarter as our new hires, many of whom joined our firm in the past year, integrate and re-engage with their clients. As an example, our number of active assignments is up approximately 25% since our last earnings call. We expect our transaction pipeline to be meaningfully higher heading into 2017 relative to 2016. We remain highly focused on recruiting best-in-class talent to our Strategic Advisory platform. This will enable us to expand our footprint and serve more clients.

More broadly, our brand on campus is clearly resonating. By example, this recruiting season, we had over 4,300 highly qualified applicants for our internship programs representing more than 100 applications for every available position.

I will now turn it over to Helen to review our reported results and then close with our outlook for the business.

Thank you, Paul. Good morning. I'll begin with review and revenues. Total revenues for the quarter were $121 million, up 36% compared with second quarter revenues of $89 million and down 18% compared with third quarter 2015 revenues of $147 million. The breakdown of revenues, Advisory revenues were $101 million compared with $116 million for the third quarter 2015, down 15% year-over-year. Advisory revenues in the quarter were driven by very strong restructuring activity, where we had an increase in both the number and size of transactions that closed during the third quarter.

Placement revenues were $18 million compared with $28 million for the third quarter 2015, down 34% year-over-year. The decrease was driven primarily by a reduced number of fund placement closings, particularly for hedge fund and real estate clients.

For the nine months ended September 30, total revenues were $326 million, up 8% compared with revenues of $302 million for the first nine months of 2015. And the breakdown of nine months' Advisory revenues were $241 million compared with $221 million for the same period last year, up 9% year-over-year. And again, the primary driver of the increase in Advisory revenues was a substantial increase in restructuring activity compared with the first nine months last year. Placement revenues were $79 million compared with $76 million for the same period last year, up 4% year-over-year.

Turning to expenses. Consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments and these adjustments are more fully described in our 8-K. First, adjusted compensation expense. For the third quarter compensation expense was $79 million compared with $68 million for the third quarter 2015. And year-to-date compensation expense was $208 million compared with $185 million for the first nine months of 2015. The year-to-date increase reflects the overall increase in revenues as well as an increase in headcount. And year-to-date, our headcount is up 17%. Compensation expense as a percentage of revenues was 65% for the third quarter, 63.7% year-to-date and an increase from 46.5% in the third quarter and 61.2% for the first nine months of 2015.

Turning to adjusted non-compensation expense. Total non-compensation expense was $21 million in the third quarter and $68 million year-to-date, and as a percentage of revenues, 17.7% in the third quarter and 20.8% year-to-date. We've mentioned previously that year-over-year comparisons, unless meaningful, given the composition of costs pre and post spin, we continue to actively manage our expenses and the operating cost in the underlying business are in line with our expectations.

The Caspersen-related costs declined significantly in the third quarter. Excluding these charges of approximately $7.4 million year-to-date, our adjusted non-comp expense as a percentage of revenues would be 18.6% compared with the reported 20.8%.

Turning to adjusted pre-tax income. We reported pre-tax income of $21 million in the third quarter and $50 million year-to-date. Our adjusted pre-tax margin was 17.3% in the third quarter and 15.5% year-to-date. The provision for taxes, as with the second quarter, we presented our results as if all partnership units had been converted to shares so that PJT Partners Inc., our publicly traded entity, owned 100% of the partnership units. And as a consequence, all of our income was taxed at the corporate tax rate. And with that adjustment, the effective tax rate would be 38.6% for the quarter and 38.7% year-to-date.

Our share count, at the end of the earnings release, we provided a summary of our share count, including the breakdown of the share components. The number of shares used to calculate our three-month, if converted earnings per share is 37.42 million shares. And during the third quarter, we received notice from certain holders of PJT Holdings units that they were exercising their right to exchange their units. This is the first time they've had the opportunity to exercise the quarterly exchange rates. The number of units submitted for exchange was approximately 594,000. We have the option to settle exchanges in either cash or shares and we've chosen to settle this exchange in cash. The transaction will close on November 8 and our share count, which includes holdings units will then be reduced by approximately 594,000. And going forward, there will be approximately 9.5 million listed partnership units held by current and former Blackstone employees.

A couple of notes on the balance sheet, we ended the quarter with $157 million in cash and no funded debt. And in October, we renewed our revolving credit facility with First Republic Bank. And finally, the Board has approved a dividend of $0.05 per share. The dividend will be paid on December 21 to Class A common shareholders of record on December 7.

I'll now turn it back to Paul.

Thank you, Helen. Before I turn to our firm outlook, I wanted to reiterate our view of capital deployment and how it relates to our decision to acquire approximately 594,000 partnership units for cash. Our highest return will come from our people and the talent we attract to PJT. Accordingly, investing in talent is our highest capital priority, a close second is managing share dilution. When we started a year ago with two market-leading businesses in Restructuring and Park Hill, we were in the early stages of scaling our Strategic Advisory business. We've talked about the fact that the steps taken to reposition the Strategic Advisory business in 2015 would have an adverse financial impact in 2016, that was set us up for significant future growth in 2017 and beyond. We also believe that the strength of the Restructuring and Park Hill businesses and the unshackling from Blackstone would enable us to grow overall revenues this year even though it is a year of considerable transition.

As we sit here today, the fourth quarter is shaping up to be stronger than the third quarter, and we remain confident in our growth prospects for 2017 and beyond. We are building PJT Partners with a focus on serving clients through any cycle and positioning our firm for growth in most any market environment by gaining mind share and market share.

Thank you. And I'd be happy to take your questions.

(Operator Instructions) Ashley Serrao.

Good morning. I guess first question on the hiring outlook for the firm. I know you've been very selective, but just wanted to get your latest thoughts on any industries or geographies that you would like to particularly target? And if you also feel that with the upcoming recruiting cycle -- recruiting season, weather more PJT caliber talent will be available in 2017?

Actually, I think there is no doubt that we're going to continue to aggressively expand our footprint and I think there is no doubt that you'll see significant hires over the coming months and continuing well into 2017 and beyond. We're just at the very early stages in building out our footprint. I think what we've said repeatedly is, it's very difficult to have a quota quarter by quarter. There are a very significant number of dialogs we're having and it takes the right time and moment for each of those individuals to commit and to move forward. So it's going to be lumpy, you'll see it in batches as opposed to a steady flow.

And as far as geographies and industries, there are a whole host of opportunities for us and we have so much white space that almost any opportunity that presents itself with the right individual that we believe we can quickly fill in behind and support that individual or individuals is a place that we're going to proceed. And if you think about how we've approached the business, we've approach the business by making sure that we have global capabilities, although we have fewer offices than others. So almost every banker that we've hired has worked in multiple geographies or has clients in multiple geographies and is very comfortable traveling the globe, which is why even at these early stages, we have a firm that represents clients in more than 30 countries around the globe.

So you should expect that the pace of hiring should accelerate in 2017 and beyond. What's happened in 2016 is we've added more than 70 professionals to our Advisory team. But one of the factors is, we made a decision to downsize the Advisory business to make sure that we could retool it for future growth and when we've added 70 advisory professionals to our platform, we're now finally head count levels commensurate with where we were in September of 2014 when we first announced this transaction.

Thank you for all the color there. And I guess just moving on to fund placement curious if the weakness in the hedge fund businesses intensified further in 4Q? And is there any offset here? I'm just trying to get a sense if this is a new run rate for revenues for the foreseeable future.

Absolutely not. It's a lumpy business and that's why it's very difficult quarter to quarter to get a picture of the business. If you look at the fund placement business in aggregate for the year or if you look at it over the nine months, I think it compares favorably to comparisons, but typically, there is a back-end load in terms of revenue recognition in fund placement, which suggests more revenues being recorded in the fourth quarter.

And as I said before, one of the interesting things is we are seeing some of the largest asset managers actually come to Park Hill looking to develop a relationship so that Park Hill can introduce then we're development expand their roster of existing investors. So an interesting way when things are going along swimmingly, there is a whole host of hedge fund clients who don't see the need for a placement agent or for the capabilities and specialist skillset of a Park Hill. But in a more difficult environment, a number of those entities have come to Park Hill asking for their assistance in filling out their client LP roaster.

Devin Ryan, JMP Securities.

Hey good morning, everyone. A few from me. I guess first, good to hear about active assignments being up 25% from the second quarter, that's pretty impressive. I think Paul, last time we spoke, it sounded like the election was having a little bit of disruption around activity. So I'm just curious if you think you could actually even see an acceleration in prime on the M&A side post election?

I think there is the PJT story and then there's the broader story. I think for us, every day that goes by, we're gaining more traction, every day that goes by we have someone who's come onto our platform or someone who no longer has gardening restrictions or other impediments to engaging in client dialog. So for us, every week or month, it appears to us that the brand is building, we have more of our bankers engaging with more clients and the activity levels are increasing. So I expect that to increase almost regardless of the macro environment.

As far as the macro environment, I think I've been pretty clear, which is in terms of absolute levels of M&A activity, we are at very robust levels. I think you're likely to see some small contraction in terms of overall activity levels, but still putting us at very, very robust absolute levels and I don't see that changing when I look at over the intermediate and long-term. And for me, the principal reason for that is the world is just speeding up. And there's more dislocation, technology is driving a lot of this and the business models can no longer afford to just remain as is, they need to change. And when you have more disruption, you end up needing to react to that disruption with more aggressive change and that to us suggests that the pace of M&A activity, if you look at it over a long-cycle, is likely to continue at levels that are elevated relative to historic norms.

But it's a cyclical business in the sense that even though the long-term trends maybe very positive, that's not to say that a quarter-to-quarter or year-to-year, there won't be swings up or down, because there is so much in front of us, so much white space and as we continue to build out our firm, our brand and expand our footprint, we see opportunities to take considerable market share in almost any environment.

Great. Very helpful color. Maybe one on restructuring here, I heard the comments that we've seen a little bit of moderating in just the pace of new assignments. I'm curious in terms of the revenue outlook, just given the kind of the long lead time for deals actually closed, should we expect that you could still see an acceleration in revenues there into next year just as deals that were announced earlier in this year, maybe still a lot ways to go to close?

Well, I think in my comments I made the point that we see a very constructive outlook for our business from a revenue perspective for the fourth quarter and well into 2017. And then beyond that, I'm quite confident that we'll continue to enjoy a market-leading restructuring position. And while energy mandates may have slowed in terms of pace, we're still seeing a lot of dislocation and a lot of activity in energy. We're also seeing it spread to other industries and other geographies. So you're seeing a lot of bubble up in shipping, you're seeing a lot of bubble up in retail, you're seeing a lot -- outside the United States, you're seeing a lot coming from (inaudible) in the two LBOs of 8 years, 10 years ago. So we're quite constructive about the long-term opportunities in restructuring. But there is no doubt that we're still operating at very high levels of activity and our pipeline is very robust and should give us a significant tailwind into 2017.

Great. Okay, got it. And maybe one here just on compensation. I don't know if you guys have any early thoughts around the composition of the compensation pool this year just between cash and stock? I understand the commentary just around the value that you see in your stock here and I'm just curious how that might play into thoughts around compensation and maybe minimizing dilution?

It's very important to us that our employees be aligned with us and have significant equity ownership and significant equity incentive. And that's our goal. That is our objective. I think for a variety of reasons, which we've spoken about previously, 2015 year-end was aberrational for many reasons, not least of which the fact that many of those employees have spent nine months at Blackstone, not at our new firm, the fact that we had an opportunity to acquire a nearly $30 million block of stock on behalf of the partners and we had extraordinarily high take-up rate amongst those partners. So we were able to increase the equitization of our key employees while avoiding the dilutive effects.

We're now into a different part of the cycle where Helen talked about repurchasing nearly 600,000 partnership units in this quarter. We now have more tools available to us to minimize or mitigate dilution.

So I would expect that over time you're going to start to see the compensation mix being much more of a traditional cash and stock mix for our employees, but at the same time Helen and I and the rest of the management team are keenly focused on making sure that we do that and that we continue to acquire the best-in-class talent, but also managing the share count over time.

Steven Chubak, Nomura.

Good morning, guys. This is actually [Julian Kreitsar] filling in for Steven. So thank you for giving some really good commentary around like recruitment. I was just wondering if possible for you guys to break out the current SMB count between M&A, restructuring and Park Hill?

The patent accounts?

Yes.

I think we have approximately 50 partners overall in the firm and approximately 20 of those are in Strategic Advisory.

And then for the 30 remaining, would you say it's an even split between Restructuring and Park Hill or?

Roughly, then I think it's 13 in restructuring at the balance in Park Hill.

Okay. And then I'm just switching over to M&A. So given your commentary on the momentum of your Advisory business, do you expect to see a stronger 4Q for M&A that's consistent with other independent peers that have reported recently?

Well, it's two things, one is, we're still in early days in terms of Advisory. What I said in my comments is we're quite constructive on our fourth quarter as a firm. So you're going to see a stronger fourth quarter for us relative to the third quarter which in turn was stronger than the other two quarters in the year.

And I'm not a fan of quarterly direction, but in our first year as an independent public company, where there's not a lot of historical track record for what this firm is today and what it's becoming, I'm comfortable showing a little bit more leg in that regard, but I just want to be clear, I don't think this is a business where it really lends itself to quarterly guidance. And there is a lot of lumpiness, but I am quite confident in the strength of our business. I'm quite confident in the fourth quarter being stronger than the third. And I'm confident that we're building momentum in our Advisory business. And for the first time in 2017, you'll start to see the fruits of an advisory teams that will have been together for approximately one year and we see a lot of momentum in that team. We also see a lot of momentum as we continue to add others to our firm.

And then lastly, just looking at your growth story overall, so it seems like you said this year 2016 will be the year of transition and 2017 will be the year of growth and returning or demonstrating operating leverage. And it sounds like you guys are very, very committed to those goals. Could you maybe give us some color on, like how your thinking has evolved along the way now that you have been a public company for about a year and you have about a year of independent results under your belt.

Well, I think a few things, one is everything that we believe when we started rings more true today than it did before. What we said back in 2015 was we could dramatically transform and restructure the Strategic Advisory business, which would have significant financial consequences in 2016, but position us for growth in 2017 and beyond. And notwithstanding all of that significant restructuring, we could still generate growth in 2016. And I think based on my comments and the nine-month results is very clear that we've been able to do that.

I also made the point early on that, we believed that the way we were set up that our non-compensation costs were quite competitive with most any peer and in many instances, were significantly advantaged and we have more conviction about that today than we did even when we began this journey. We also talked about our confidence in being able to recruit and to win off of this platform and we feel very strongly and committed to that and I think the evidence has borne that out.

And then finally, we've made the case that being outside of Blackstone, being separate, independent and getting these three businesses to join together and to gel that there are tremendous opportunities both to serve our clients and in turn ultimately to reward our shareholders. And all of that that that we saw when we began to have these dialogs in the third quarter and fourth quarter of 2015, we feel today with greater conviction and more history behind us, but we also recognize that every quarter that we can allow the picture to develop a little bit more the more the people on the outside can begin to see what we here on the inside see.

Well, thank you all very much.

Ashley Serrao, Credit Suisse.

So wanted to just dig into the commentary in your prepared remarks where you noted some strength in the secondary advisory business. I was just curious to get your take on where we are in the secondary advisory cycle? And can you also just remind us how many partners you have dedicated to the business after the latest hire?

We have two partners right now in secondary advisory, but it's also a business that works hand in glove with our Advisory team. So if you look at the number of partners who are focused on the effort, it is significant and it's one of the touch points where you're starting to see the multi-disciplinary gang tackling approach begin to payoff. And when you think about all of the trends were quite constructive on the opportunities in the secondary advisory space.

We see significant opportunities for holders of significant PE portfolio stakes who may [want to get] capital release, that's just one example, but there may well be a number of financial institutions who will benefit from repositioning their PE portfolio and being able to reduce the capital committed against this.

So as everywhere we look we've see opportunities abound and we are quite constructive on the business and see this as being one of the significant growth engines inside of the Park Hill business and that's why we are quite comfortable in continuing to add an investment and we're delighted that the opportunity to introduce a new senior partner to our firm focused on secondary advisory and that's a space where you'll see a lot of continued activity for us.

Okay. And I just want to clarify, on the expense side, were there any lingering one-time costs relating to the Caspersen episode running through the income statement this quarter?

In this quarter, there were some legal costs, but they were in the range of $600,000, so they reduced significantly versus the prior two quarters.

Okay. And final question is on the exchanges this quarter, can you just give us a sense of -- is this is roughly the same amount that's coming up in the subsequent quarters -- in the forthcoming quarters over the next year or so? Or is it just more opportunistic just we really variable at the end of day?

Well, it's driven by the holders of the units. They, at any point in time, have the ability to convert their partnership units into shares, up at the publicly traded vehicle. So we look at this and see this as a tremendous asset for the firm because it gives us tremendous flexibility. If we simply exchange the partnership units per shares we can increase the float significantly without having to increase the economic dilution at all because all of those units already accounted for in our shares outstanding.

If we intend to repurchase some of them, we have the ability to take our excess capital and to repurchase units which are accretive to all the other shareowners without reducing float. So from our perspective, this is an asset that we have, which gives us far more flexibility in capital management and how many of those units choose to exchange in any given quarter is really going to be driven by those holders and the 9.5 million units that Helen talked about are the sum total of those remaining units after this repurchase.

All right. Well, seeing as there now are no more questions, I wish everyone a good day. And we will speak to you around our next earnings call. Thank you.

Thank you.

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