PJT Partners Inc (PJT) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PJT Partners First Quarter 2017 Earnings Call. My name is Mark, and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thank you very much, Mark, and good morning, and welcome to the PJT Partners First Quarter 2017 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 section, contained in PJT Partners 2016 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 and that 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'll turn the call over to Paul.

Thank you, Sharon, and good morning, everyone. Thanks for joining us today. I'm pleased to report on our continuing progress at PJT. We remain focused on expanding our Strategic Advisory footprint, while enhancing our leadership positions in Restructuring and Park Hill. The power of these 3 businesses working together, combined with the additional best-in-class talent we are attracting, positions us to significantly increase our market shares.

In the first quarter of 2017, our Advisory revenues grew 22%, while overall firm revenues increased 5%. Strategic Advisory and Restructuring both performed well versus year ago results. The early returns in our Strategic Advisory build-out continue to be encouraging. As measured by client engagement, active mandates and announced transactions, 2017 is off to a fast start relative to a year ago.

Our Restructuring business had another strong quarter and maintained its leading position. Park Hill was down considerably for the quarter, principally due to an absence of significant closings in the quarter. This business is quite consistent as measured in years, but inherently variable from quarter-to-quarter. Given our pipeline of engagements, we remain constructive on the Park Hill business for 2017 and beyond.

Turning to each of our businesses in a bit more detail. In Park Hill, real estate, private equity and secondaries saw an absence of significant closings in the quarter. However, our full year outlook for these businesses, including hedge funds, remain strong. The demand for private equity products is robust, and we have a number of high-quality fund raisings well underway. In real estate, we intend to benefit from investors' increasing interest in participating in direct investments. Park Hill is seeking to capitalize on this opportunity. A partner and a managing director recently joined the team to focus on real estate asset level transactions. We see significant opportunities in the secondary Advisory business as it relates to securitizations and GP-led transactions. The expertise within our Strategic Advisory business should continue to aid these securitization efforts.

Turning to Restructuring. Our strong results from 2016 continued into Q1 '17. We benefited from a number of significant closings in the quarter, particularly in the energy sector. While we continue to be appropriately cautious on the near-term macro outlook for Restructuring, our backlog increased during the quarter as we added a number of significant high-profile mandates across a variety of sectors. The pace of industry-wide activity has slowed from the high levels in 2016, but our level of new deal activity remains robust. We are certainly seeing the results of closer collaboration between our Restructuring and Strategic Advisory bankers, and now, have more joint mandates than ever before. While energy activity is clearly less frenzied, we are seeing some pick up in activity around the globe in sectors such as power, retail, health care, TMT and shipping.

Turning to Strategic Advisory. We generated strong year-over-year growth in Strategic Advisory. We experienced a significant increase in both the number and dollar value of announced transactions in 2017 as compared to a year ago. These deals should create meaningful revenue uplift in the second half of the year versus the first half for Strategic Advisory. The level of client dialogues continues to accelerate, we are competing for and winning an increasing number of significant assignments. By presenting our clients with differentiated capabilities, success will no doubt follow. Our clients increasingly appreciate the depth and breadth of our advisory teams. We are committed to expanding our focus areas without compromising either our high standards for talent or our strong partnership culture.

Recent partner additions deepened our expertise in industrials, real estate, gaming and lodging as well as equity capital markets. We are already seeing the contribution of these hires and are confident in their ability to help expand our business. We are in advanced dialogues with a number of high-impact senior bankers and expect to add several more partners this year. Every day that passes, our brand grows in strength, our bankers gain more traction and we improve our competitive position.

I will now turn it over to Helen to review our financials.

And thank you, Paul. Good morning. Beginning with revenues. Total revenues for the quarter were $121 million, up 5% compared with the first quarter 2016. And the breakdown of revenues: Advisory revenues, which include Strategic Advisory, Restructuring and the secondary Advisory business and Park Hill, were $99 million, up 22% versus the same period last year.

As Paul mentioned, the growth was driven by revenue increases in both Strategic Advisory and Restructuring.

Placement revenues were $20 million, down approximately 39% from the same period last year. While the number of fee-paying clients was essentially unchanged year-over-year, the relative absence of significant closings in the placement business during the quarter was the principal driver of the year-over-year revenue decline. As was evidenced last year, there is a loss of quarterly variability in the placement business and we remain constructive on the outlook for placement revenues for the full year.

And turning to expenses. Consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments, which are more fully described in our 8K.

First, adjusted compensation expense. First quarter 2017 compensation expense was $77 million or 64% of revenues compared with 63.1% in the first quarter of 2016. This ratio is consistent with the full year 2016 compensation ratio as adjusted for certain extraordinary items and represents our current best estimate for the compensation ratio for the full year.

Turning to adjusted non-compensation expense. We remain focused on controlling our non-compensation expenses. Total adjusted non-comp expense was $20.9 million for the first quarter 2017 compared with $21.6 million in the same period last year. And as a percentage of revenues, 17.3% for the first quarter 2017 compared with 18.7% in the first quarter last year.

And turning to adjusted pretax income. We reported adjusted pretax income of $22.6 million for the first quarter, and our adjusted pretax margin was 18.7% compared with 18.1% in first quarter 2016.

On the provision for taxes. As with prior quarters, we presented our results as if all partnership units had been converted to shares, so that assumes all of our income was taxed at corporate tax rates. Our tax rate also takes into account the tax benefit related to the delivery of vested shares in the quarter at a value higher than the amortized cost.

Taking into account this benefit, our current estimate of the effective tax rate for the full year is 36.4%, and this is the rate we applied in the first quarter. Excluding the tax benefit, the effective tax rate would have been 39.2%.

On earnings per share, our adjusted if-converted earnings was $0.38 per share in the first quarter compared with $0.35 in the first quarter last year. The first quarter impact from the reduction in tax expense was $0.02 per share. The adjusted if-converted earnings will therefore have been $0.36 per share without this tax benefit.

On the share count for the quarter, our weighted average share count was 37.8 million shares. And as we've discussed on prior calls, partnership units, which are owned primarily by current and former Blackstone employees can be exchanged on a quarterly basis, and we have the option to settle those exchanges in either cash or Class A shares.

During the first quarter of 2017, we received exchange notices from holders representing approximately 527,000 partnership units, and we have elected to settle this exchange in cash. We continue to view these exchanges as an opportunity for us to minimize [solution] without impacting our public float. With this latest exchange for cash, we will have repurchased approximately 1.5 million partnership units since our spin.

On the balance sheet, we ended the quarter with $98 million in cash, cash equivalents, and short-term investments, $187 million in net working capital, and no funded debt. And finally, the board has approved the dividend of $0.05 per share. The dividend will be paid on June 22 to Class A common shareholders of record on June 8.

And now back to Paul.

Thank you, Helen. As we have said from the outset, we remain focused on our clients, our employees and our shareholders. We will continue to serve our clients by attracting best-in-class talent, continue to appropriately reward our employees and continue to serve as diligent stewards for our shareholders.

In terms of capital management, as Helen mentioned, we have committed to repurchase an additional 527,000 holdings units, which by itself will offset a portion of previous employee grants. Including this repurchase, our fully diluted share count will have increased by less than 2%, while our senior headcount will have increased by almost 40% since spin.

From my perspective, the current political and economic uncertainty around the globe creates a challenging backdrop for CEOs and boards to navigate. In this environment, clients are more discerning about quality advice, which plays to our strengths. By serving clients with excellence, we are positioned to gain mind share and market share and grow in most any market environment. We remain confident in our near, intermediate and long-term growth prospects. Thank you. Now if there are any questions?

(Operator Instructions) Our first question comes from Mike Needham from Bank of America.

So first, I think, just wondering on Restructuring versus the Advisory business in the first quarter. It sounds like both were up year-over-year, so you're seeing progress in both. I'm just wondering for the first quarter, did it benefit from any, like elevated level of transaction fees in the Restructuring business or is it kind of a normal quarter? And then second on the pickup in the other sectors you mentioned, I think it was power, retail, health care, TMT, would you expect that trend to continue?

Look, it was as normal a quarter as any quarter could be. Every quarter is obviously a bit different, but there was nothing extraordinary in terms of timing or significance to the quarter. I think it reflects the continued success of our Restructuring business, and we certainly see that success continuing. I think there is no doubt that the composition, Mike, of Restructuring candidates will continue to shift and pivot away from energy dominated to a broader base. And we're in the midst of that mix shift right now, and we're certainly doing our best to maintain and increase our market shares in the Restructuring environment. And I think it's fair to say that by separating the business from Blackstone, every day that passes, and every day that our Strategic Advisory team strengthens, our Restructuring team gets more looks, more opportunities and sees more success on a relative basis.

Okay. That make sense. And then on the outlook for Park Hill. How much clarity do you have on that businesses' pipeline? And is it that clarity that's giving you confidence for the balance of the year?

I think the answer is -- the short answer is, yes.

Okay. Fair enough. And then just one on expenses, is -- was this is a pretty clean quarter for non-comp? I know last year there were some kind of one-timers, but if I look at what you guys report for 1Q, is that the right number to build off of?

Yes. That was a clean quarter. And we would expect a modest upgrade -- uptick in expenses as the year goes on. I think the first quarter tends to be historically low, but it was a clean quarter.

Okay, very good. And just last, if you want to give an update on hiring, just kind of where you guys are looking, how receptive people have been for the pipeline or I'm sorry, to the platform. Any -- how you think this year is going to be from a -- like an Advisory business hiring standpoint.

Well, Mike, I think it's fair to say that we have a tremendous amount of interest in individuals joining our platform. We're being incredibly discerning about the partners who we add, and in what areas to make sure that every addition is quite accretive, which means it needs to help build a critical mass. And if you look at our hiring patterns, we added in equity markets -- equity capital markets capability, which ducktails with the leverage, finance and Restructuring -- and structuring capabilities that we have. So we're building out a much stronger Capital Markets Advisory team. If you look at what we've done in real estate, we've added 2 partners with incredible impact and wonderful credentials and client connectivity. And then we have the Park Hill real estate bankers, who together create true critical mass there. We've hired 2 recent industrials bankers, which adds to other strength that we have. So we're trying to build out sectors of excellence and from excellence to have increasing market influence. That's the strategy. And at the same time, we've made the point, the individuals have to be very consistent with the partnership culture, and they have to be best-in-class. So we see the marketplace as very opportunistic. And we'll continue to add partners as the right time and fit. We have a lot of dialogues, where the individuals have identified themselves as very interested in the platform, we're quite interested in them. And then we're just waiting for the right time for us to make the move together. So I'm continuing to be quite optimistic about our hiring, but like everything else, it's not machine-like Swiss precision one a month, it tends to be in clumps. And that's what you'll see over the next few years.

Your next question comes from Devin Ryan from JMP Securities.

So just curious on a question on just kind of the M&A, commentary from some of your peers we've been hearing, a lot about cooling and kind of the megadeals. But the middle markets have remained open and some companies actually feel like that's an area that's been picking up. And that -- doesn't always get captured that well in the industry data sources that we all cite. And so it sounds like your outlook is a bit mixed for the industry activity. You've been right, obviously, over the past several quarters. Just curious if that's a comment more on large multinational clients or are you also seeing kind of a slower level of activity in the middle markets? And then what's the scenario, where things really change or where we can really take off from this level?

I appreciate, given your report card on forecasting. I'm going to continue to make predictions until I'm wrong and then I'm going to withdraw for a little bit. So while I'm in a winning streak, I'll continue for a little bit here. I'd say the following, if you step way back -- way, way back, we're simply debating how favorable and how constructive the current M&A environment is by historic standards. And the answer to that is, it's quite constructive, it's quite favorable. It may have cooled off from absolute, unsustainable record levels. But as a general proposition, the level of M&A activity measured by almost any traditional benchmark is quite healthy. And I think sometimes in this discourse about, is it going to be up or down X or Y%, we lose that perspective. So that would be the first thing. Second thing I've said is that the current political and economic uncertainty does not chill or affect all deals. There are many transactions that will continue apace regardless of who occupies the White House, regardless of what tax policy is, regardless of the elections in France. And for the vast majority of transactions, they are not particularly influenced by some of the factors that we're talking about. But clearly, at the margins, those transactions that are influenced by those factors, will either be slowed or paused, put on hold until greater clarity develops. And I think that's what you're seeing and that's why we had suggested that this year would be down about 10%, because we saw most of the transactions not being influenced. But at the margins, you would lose some transaction activity. And I think it's fair to say that smaller transactions have less to do with overall antitrust policy, overall macroeconomic issues, whether or not cash can be repatriated from abroad, whether or not there is going to be a border tax, et cetera. So to me it's sort of a common sense that smaller transactions are less affected and you would see less impact and I think that in fact has been the case.

Okay. That makes a lot of sense there. I appreciate the color there. And then maybe a follow-up here on Park Hill. Just to understand the dynamic in the placement revenues, was it environmental this quarter? Or was it just idiosyncratic to the deals and their specific timings and it's a lumpy business. And so it can kind of just bounce around, just curious kind of how you would frame that?

Well, I'd certainly say it's idiosyncratic. If you just look at last year, I think we had something like $20 million in placement revenues. In the third quarter, we have $40 million and in the fourth quarter, same business. So I'm trying to make this point, I have reasonable clarity in thinking about our business year-over-year. It's very difficult to do that quarter-to-quarter. And Park Hill, which in many respects is the steadiest of businesses, is quite unsteady when measured quarter-to-quarter, but remarkably steady when measured year-over-year. Having said that, if you ask me where the growth opportunities are? I'd make a couple of points. The private equity business continues to be very robust. It's an asset class that continues to be in demand. There is an awful lot of capital out there, a lot of capital has been returned to LPs, who in turn are looking to redeploy that. And the private equity business, has -- and continues to enjoy great success, and we're part of that. The hedge fund business ironically was our strongest this quarter and of any macroeconomic backdrop you'd expect it to be the weakest. So we've always said that because we have the highest filter that in a flight to quality environment, we would be better positioned than others. We've made the point that we think secondaries is a long-term secular uptick and that's why we have invested in the business. And we made a partner promote in Europe, and we added a partner in the U.S. late last year. And as we continue to build out our footprint in our Strategic Advisory, those 2 businesses will complement each other and you will see more. And we've also made the point that there is an environmental change in real estate, where increasingly there is a preference for direct investment. And we repositioned our footprint and made a partner higher in real estate to be able to capitalize on that. So I think there is some long-term trends, which we continue to talk about, but quarter-to-quarter idiosyncratic.

Got it. Okay. That's helpful. And then last one here just with respect to thoughts around acquisitions at the front level, are there any small acquisitions you would look at to think about accelerating growth into a sector or geography, especially with the stock moving higher here or obviously, you're quite discerning around who's being added, maybe that's just too broad of an approach, so just curious your thoughts there?

Well, the first point on the stock moving higher. If you notice, we all continue to buy it, so that suggests it maybe, we're not been delighted to be issuing it at these levels, but that's just my own personal aside. I think we're -- look, we're stewards of everyone's financial investments, and we're always going to look at things and we're going to be broaden our thought and we're going to be always trying to figure out ways to advance the practice and to move ourselves forward. And if there is an opportunity to buy versus build, we're certainly open to looking at things, but it has to have an incredibly high bar because we are very comfortable and have been very successful in organic build. And we have said repeatedly that one of the big differentiators of our firm is partnership culture. And we will never do anything to jeopardize that, because in many respects, that's such a wonderful advantage we want to make sure that we do nothing, that doesn't continue that environment. And therefore, it's an extraordinarily high bar, but like anything else in the world, you have an obligation to at least hear people out.

And our last question comes from the line of Julian Craitar from Nomura.

So just kicking things off with a question on revenues. Specifically, the revenue mix within the Advisory line. How should we be thinking about that trajectory going forward? I know that M&A will continue to be an area of growth for you. And in your business specifically, you probably will be less affected by the dampened animal spirits we're currently seeing in the market, but it seems at least like according to your commentary and then some of your peers that Restructuring may still have some runway. I'm just trying to get a sense as to where we will be seeing the incremental growth in that line item this year, whether it'll be more weighted towards the Advisory line or towards M&A or towards Restructuring?

M&A. It's -- I mean that M&A is our growth driver, that is the business where we have an enormous opportunity to take market share. And we have an ability to take market share in most, any macro environment. And therefore, I think you'll see, the incremental growth of our firm being increasingly driven by that. But I also think it's the power of the 3 businesses, operating as one. And sometimes it's very hard to figure out where that resides in the firm, but it may get booked in one place, but it's really being able to take the network and to expand the network. And having these 3 businesses and having them work very closely and collaboratively expands our capabilities of the network and gives us more looks. So that's why we tend to think about it as a holistic P&L, but I think it's fair to say that the predominance of the growth for the next few years will be in Strategic Advisory.

Okay. And just sticking with Strategic Advisory for a second. I know that you've said in the past that it's more of a market share story versus like a revenue story. And I was just wondering if the better outlook in Europe has helped push these plans along -- these growth plans along. Or is it more of like the increased productivity from the new hires that have now been with the firm for at least 9 to 12 months, or is it something else that we should be thinking about?

Like my view on the macroeconomic environment is, when you're starting with a small footprint, there are so many opportunities to be able to expand the presence of the firm and to be recognized for differentiated capabilities that you can do an awful lot of business in most, any environment. Unless the world really shuts down for a while and that does happen from time-to-time if there's some global political crisis where no one transacts, but unless you're dealing with really large deviations from the norm, I think we're very comfortable that we'll continue to do more business as our bankers are on our platform for longer, as they have an opportunity to engage with clients, to turn that engagement into mandates, to turn those mandates into announcements, then those announcements need to be turned into reported revenues. There is just a lag time. And we're now going to start to see the first wave of that maturation process over the next year or so and then the next wave of partner additions will do the same. So we're much more focused on our idiosyncratic story for a while, than we are about the overall market. I think if you are a firm that has a leading or near-leading market share, it's almost impossible to grow your business unless the overall pie grows. We're much more a slice of pie than a size of pie story for a while.

Okay. And then lastly, just focusing, just like piggybacking off of your comments, so it seems like, yes, that the growth is going to be coming from the M&A line, and like you're very constructive on that. I was wondering if that outlook is reflected in your expense outlook for -- particularly for the compensation ratio. I was just wondering if -- does it reflect the potential operating leverage that you could see if the M&A build-out goes according to plan? And if it doesn't, how should we be thinking about the potential of further -- of operating leverage, if your business -- if your M&A business specifically does better than you expect?

Well, look, I think we're still in an aggressive growth phase. And since we're in an aggressive growth phase, we're making real investment. And we're making an investment, but instead of building factories, it's an investment in human capital and that's why you should expect to see our compensation as a percentage of revenue be elevated relative to others for a while. We've taken a view that since our compensation ratio was 64% last year, and we were aggressively adding folks that until proven otherwise, we're going to reserve at 64%. And we'll make adjustments at the end of the year if facts have changed. But over time, I would expect that to come down, but right now we're being very forward-thinking and making sure that if there are individuals that we can attract to our platform, they are clearly additive from a shareholder perspective, we're going to do it even if it means having elevated ratios for some period of time.

Thank you, all, for spending time with us this morning. And we will speak to you on the next earnings call. Have a good day.

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