PJT Partners Inc (PJT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PJT Partners Full Year and Fourth Quarter 2017 Earnings Call. My name is Joyce, and I will be the moderator 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.

Thanks very much, Joyce, and good morning, and welcome to the PJT Partners' Fourth 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 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'll turn the call over to Paul.

Good morning, and thank you for joining us today.

2017 fourth quarter results were our best ever. But just as we said on our last earnings call, rarely will any one reporting period be truly representative of the earnings power of our franchise or our business momentum. That is why we measure our progress in years, not quarters, and continue to view our progress through a multiyear lens.

Since our formation on October 2015, we have seen consistent progress on all fronts. We see ever-increasing benefits from the Blackstone separation. These significant and sustainable elements include an expansion of our addressable market, a more integrated and collaborative firm-wide effort to serve clients, and a substantial buildout in our Strategic Advisory footprint.

We expanded our addressable market with the elimination of conflicts. For example, even without the benefit of a dedicated financial sponsor coverage effort, we are working with a significantly greater number of financial sponsors. We are committed to building upon this momentum, as we expand our sponsor coverage universe. This month, we added a partner to lead this important effort.

Nowhere have our collaborative firm-wide efforts been impactful than in our global Restructuring business. Given the standout performance of our Restructuring business in 2016, 2017 was a year of challenging comparisons. However, the increasingly integrated efforts of our Restructuring and Strategic Advisory businesses, coupled with a more formidable Strategic Advisory capability, helped to mitigate the financial impact of the slowdown in global Restructuring activity.

We have steadily and methodically increased the breadth and depth of our Strategic Advisory franchise. We ended the year with 30 partners in Strategic Advisory, including 3 partner promotes, 2 of whom were recruited as managing directors within the past 2 years. Our Strategic Advisory partner count has increased by 50% from a year ago.

Furthermore, the percentage of partners who have spent at least 2 years on our platform has increased from less than 1/3 at spin to more than 1/2 currently. We continue to be viewed as a leading destination for top talent and have a robust pipeline of senior bankers interested in joining our platform.

All in all, we are pleased with the demonstrated progress across all of our goals set forth when we began this journey.

Turning now to our businesses in a bit more detail. In Park Hill, 3 of the 4 Park Hill businesses recorded strong performance in 2017. Even with a weakened real estate fundraising environment, Park Hill as a whole was up year-on-year. Through our investments in talent and further integration with our Strategic Advisory coverage platform, we are increasingly better positioned to advise clients on complex GP solutions transactions. These efforts have resulted in meaningful revenue increases in secondary advisory relative to 2015 and 2016 levels.

Given our recent investments, we expect our secondary advisory and real estate verticals, which best lend themselves to joint solutions with Strategic Advisory, to be the principal near-term growth drivers for Park Hill.

In Restructuring, we maintained our position as a leading Restructuring franchise. In 2017, we were able to largely offset the slower pace of energy-related activity with strength in several industries, including retail, health care, power and TMT. In addition, we saw significant strength in Restructuring outside the U.S. Our global Restructuring backlog is comparable to year-ago levels.

In Strategic Advisory, revenues grew for both the fourth quarter and full year 2017. We are beginning to see the impact of our increased footprint, as we engage with more clients. We have grown our capabilities across a number of industry sectors and products, which has expanded our addressable market. The number of Strategic Advisory mandates continues to build relative to last year, and our mandate mix is shifting to larger, more complex assignments with greater fee prospects. We are extremely confident in our ability to continue to build out a premier Strategic Advisory business.

I will now turn the call over to Helen to review our financial results.

Thank you, Paul. Good morning.

Beginning with revenues. Our total revenues for the year were $499 million, flat compared with 2016.

Now a breakdown of revenues. Advisory revenues were $386 million, up 2% year-over-year, with higher Strategic Advisory and secondary advisory fees offsetting a decline in Restructuring fees.

Placement revenues were $103 million, down 11% year-over-year, with strengths in private equity and hedge fund placement fees offset by declines in corporate private placement and real estate placement fees compared with 2016.

Now for the fourth quarter. Total revenues were $191 million on a record quarter, and up 10% compared with the fourth quarter 2016.

A breakdown of the revenues in the quarter. Advisory revenues were $153 million, up 12% year-over-year, driven by increased Strategic Advisory and secondary advisory fees. Placement revenues were 300 -- sorry, $34 million, down slightly compared with $36 million for the same period in 2016.

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

First, adjusted compensation expense. Full year compensation expense was $320 million compared with $315 million for the same period last year, and as a percentage of revenues, 64.1% in 2017 compared with 63.1% in 2016. The year-over-year increase was driven by increased headcount, which grew 13% in 2017.

Turning to adjusted non-compensation expense. Total non-compensation expense was $92 million for the full year '17 and $24 million in the fourth quarter, up slightly compared with $91 million for the full year 2016 and $23 million in the fourth quarter 2016; and as a percentage of revenues, 18.5% for the full year 2017 and 12.7% in the fourth quarter.

Now turning to adjusted pretax income. We reported pretax income of $87 million for the full year 2017 and $44 million in the fourth quarter, with an adjusted pretax margin of 17.4% for the full year and 23% in the fourth quarter.

The provision for taxes. As with prior quarters, we've presented our results as if all partnership units had been converted into shares, so that assumes all of our income was taxed at a corporate tax rate. The tax rate also takes into account the tax benefit relating to the delivery of vested shares during the year at a value higher than our amortized cost. And we excluded the tax impact of the Tax Cuts and Jobs Act, which increased our GAAP tax expense by $24.7 million as a result of a revaluation of our deferred tax asset. With those adjustments, our full year effective tax rate was 32.3%. And given the recent tax changes outlined in the Tax Cuts and Jobs Act, we would expect our 2018 effective tax rate to be in the low-20% range.

Our earnings per share -- our adjusted if-converted earnings per share was $1.54 for the full year and $0.79 in the fourth quarter.

Now turning to exchanges. In 2017, we repurchased the equivalent of approximately 1.3 million shares, primarily through exchanges, at an average price of slightly over $37 per share. Additionally, during the fourth quarter, we received notices to exchange approximately 530,000 partnership units, and as in prior quarters, we've elected to exchange these units for cash, which will settle next week.

A couple of notes on the balance sheet. We ended the year with approximately $183 million in cash and short-term investments, $201 million in net working capital and no funded debt. And finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on March 21 to Class A common shareholders of record on March 7.

I'll now turn back to Paul.

Thank you, Helen. Now let me turn back to our outlook. It's been a little over 2 years since the spin. In some ways, it seems like we've been together forever, which is a testament to the seamless integration and the strength of the culture we've created. But in other ways, it's been only a blink of an eye.

In those 2-plus years, we grew our Restructuring revenue significantly, we further strengthened the franchise for future years by eliminating structural impediments, dramatically increasing the capabilities of our Strategic Advisory business and more closely aligning these 3 businesses. We made substantial investments in the Park Hill real estate and secondary advisory businesses, which we are confident will pay significant dividends. We rebuilt the Strategic Advisory business, such that we now have a much stronger platform with a materially larger footprint and significant momentum in the marketplace.

The progress we have made and the momentum we have in our business, along with the strong partnership culture we have created, give us strong conviction about our future growth.

And with that, we'll take your questions.

(Operator Instructions) The first question comes from the line of Devin Ryan with JMP Securities.

Maybe first one here. So I heard the comment about the Restructuring backlog being similar to last year. I guess that maybe was a bit surprising and good to hear. I know you guys have a great franchise there. But been hearing a bit more subdued commentary from some of your peers. So I'm just trying to kind of parse through that and think about whether that's just -- it's some larger deals, and so those have to run through. Or maybe it's something more company-specific, where you're just kind of broadening the reach, or you're gelling from all the additional hires you made in the Strategic Advisory side. Any help there would be appreciated.

Sure. Let me give it a whirl here. So a couple of things. If you look at 2015 to 2017, I think we've seen a meaningful increase in our Restructuring revenues. But it spiked and hit a -- an intermediate high in 2016, and that sugar high was largely driven by all the activity which was commodity-based, as we were working around the clock to restructure many energy and energy-related companies. I think you saw some of that spill over into 2017; we had more difficult comparisons. And I think, as we enter 2018, virtually all of the remnants of that sugar high are kind of behind us, and we're now looking at an overall subdued marketplace for Restructuring. So if you think about this in a long-term context and just look at where default rates are and just look at the strength of credit, look at where interest rates are today, this is amongst the most benign overall credit environments that one would see. So as we think out longer term, I think it's inevitable that, that worm will turn and Restructuring activity will pick up. Having said that, we're in this interesting period right now with significant and robust GDP growth around the globe. You see the economic engine heating up, and yet you see significant pockets of dislocation in industries, and you see, as you always see, a lot of idiosyncratic trouble in individual companies that is not related to the broader macro environment. I think what we're finding increasingly is that our Restructuring team is now far better complemented with a front-end calling effort, domain expertise, relationships on the Strategic Advisory side. And as that business continues to develop, and as we build it out further, it becomes a highly complementary additional engine that makes us more competitive in a overall Restructuring marketplace. So there's a lot in that. But hopefully, that gives you a little bit of context for where we've been, where we are and, presumably, where we're going.

I appreciate that, Paul. Maybe another kind of bigger-picture question as well, just on the environment for Strategic Advisory. I think you had suggested that high valuations was one consideration holding some deals back. Valuations have only kind of moved higher, outside of maybe the last week here. But tax reform, on the other hand, I think you've said, could create a lot of conversations for a number of reasons. So I think you have some unique kind of perspectives around that. So I'm just trying to think about the push/pull between valuations, and now maybe the increased certainty that we have around tax reform and maybe that tipping the scale to do more deals. Just how do we think through kind of that, those factors impacting the M&A backdrop right now?

Yes. Well, again, there's a lot in that question, and when we think about the macro environment, there are many different drivers. So what we've said consistently -- and one thing about us, we are consistent. What we have said is that there is a secular shift to greater levels of baseline M&A, and we see that persisting for many years to come, and a lot of that is just driven by the ever-present and increasingly disruptive role that technology plays in our ecosystem. And as a result, holding periods for assets are shorter, Boards of Directors, managements need to continuously monitor whether or not they have the right toolkit, the right arsenal to compete in the marketplace. Companies will be more likely to either make investments or to withdraw and deploy capital elsewhere. So all in all, we see cycle times shortening, activity levels increasing. That's sort of point one. Point two is, this has always been and will always be a lumpy and cyclical business. And as long as there is a business cycle and as long as this world doesn't grow in a straight line, you're going to see fits and spurts about the overall macroeconomic backdrop. Within that, what we've said is that tax reform is a game changer. It's a game changer more in the long term. And actually, there'll be a sugar high in the short term, and then long term, there will be a meaningful increase. The sugar high in the short term is, there are very, very large sums of capital which are trapped outside the U.S. Some of that will come back and be reinvested in significant acquisitions. Having that clarity is probably enabling companies to think with a greater clarity of vision. And I expect that, when you look at pharmaceutical companies, technology companies that have very, very large war chests, that inevitably, some of that will be redeployed, and that's probably the short term push. Longer term, if you subscribe to our belief that this world is speeding up, when you reduce friction costs, and you enable companies to prune portfolios and instead of having to pay a very high corporate tax rate, have the corporate tax rate be in the low 20s, when you have the ability to break companies apart and be able to handle that friction cost in the context of a larger transaction, it just seems to us quite clear that over the long term, you'll see greater velocity of assets when you have lower friction costs. So that makes us quite bullish about the long term, recognizing that it's never going to be in a straight line. And with respect to recent market volatility, I suspect it will have a short-term negative effect on M&A activity. But in the intermediate term, it's going to be quite healthy. And the fact is that these corrections are very healthy for the system. They're quite disruptive and concerning in the very, very near term, but once you get this behind you, our sense is you probably have a better risk/reward trade-off on valuations. Probably, sellers who've just seen every day that they wait, asset values increase, there's nothing to get them more motivated than seeing the price they could've sold at comeback 5%, 10%, 15%. And they're sitting there saying, "If only I would get a second chance." So I think for a lot of reasons, corrections are -- I like to joke they're a little bit like annual physicals, which is, they're good for your health, you always want to put them off, they're never fun having, but you're glad you had them done. And I think that's a little bit how we think about this current correction that we're going through. It's not particularly comfortable, but net-net, over time, probably healthy in getting valuations back into line between buyers and sellers.

Got it. Appreciate that. Last one here, and I'll hop back into the queue. Just -- so for PJT, how should we think about the incremental savings from tax reform, lower tax rate? How are you thinking about the balance between share buybacks and also liquidity versus increasing the dividend, potentially, or some other means to spend some of that, if at all?

So the hierarchy that we've always talked about is, objective number one is, far and away, investing in talent, growing the talent base. We were not capital constrained in doing that before. We're certainly not capital constrained on doing it now. That's all driven by the caliber of individual that we can attract to the platform. And that's always going to be the governor. It's never going to be an affordability issue. What we've always said is our second objective is to try and mitigate as much of that dilutive effect of investment by using our excess cash to offset dilution. I think what this tax reform does is it dramatically derisks our ability to achieve the second objective in parallel with the first objective. And with respect to the third about returning capital through incremental dividends, it's not on the table right now, but at some point I think we'd get there, and presumably we'd get there sooner with this rate environment on corporate taxes than we would have previously.

Our next question comes from the line of Mike Needham with Bank of America.

So the first one I have is just to follow up on the financial sponsors comments and the new hire. I think that, that client type is probably one of the -- like the key areas for you guys to focus on. It's more [the tip of the] fee pool with the Blackstone Association. In the past, you guys hadn't won a lot. I think you have won some more. Just wondering like how big of an effort is it to win these clients? Is it -- I know some of them focused more on like the stress, private equity investing. Is that easier because of the Restructuring business? Just thinking about like how you kind of ramp that client base?

Again, you got to think about this, it's a multifactor effort. So the first is, as we build that industry verticals, and as we have deeper, more powerful domain expertise, relationships, our ability to engage in dialogues with financial sponsors that are focused on our power alleys, our ever-increasing number of industry power alleys, that creates a very powerful touch point. So it's really just a business that's likely to grow alongside our overall buildout of Strategic Advisory. And as we are in more geographies, as we are increasingly powerful and recognized as leaders in certain clients in more and more industries, then our attachment points to financial sponsors will be around that. That's number one. I think number two is, because of all the senior bankers who we have and the leadership positions they had on Wall Street for many years, there is a very deep set of relationships and connectivity between many of our bankers and these institutions. So those two, to-date, have enabled us to increasingly compete for business and to win business. What we now are adding in this methodical buildout is a more focused and dedicated effort, where individuals are tasked with leading these efforts and ensuring that the firm is increasingly connected with our clients. And when you think about all of the ways in which we touch financial sponsors, whether it's our regular way, Strategic Advisory business, it's because they may have portfolio companies that could benefit from our advice as it relates to financial restructuring, or it's in the Park Hill business, as it relates to capital formation and raises, or GP solutions and recapitalizations. It's a very, very important part of our business because it really is the glue that connects so much of our firm and enables us to present a compelling value proposition to an increasing number of clients.

Okay. That makes sense. And for the partners that have been on the platform, I think there are 18 with 2 years experience, from the presentation. Can you just comment on the progress those partners have made? Have their revenue contributions meaningfully improved since they've been on the platform? And is there still like a gap between your more seasoned partners' productivity levels and the potential that you think they need to hit?

Well, I think our potential is so vast and so powerful that there is no doubt that we have tremendous opportunity to grow into a much more powerful business, even if we weren't to increase our headcount. That's just a fact. And when we talk about these 2 years, this is not a paint-by-numbers business. We like to make a delineation between number of partners and 2-plus years. Because the reality is, unless you've been on the platform for at least 2 years, and you go through the cycle times of having gone out from PJT and begun to reinitiate a calling effort to engage with your clients to compete for mandates, to win mandates, to have those lead to successful agreements, to have those transactions then translate from agreement to revenue recognition, there's just a long lead time. But it's not as if that on 24 months and 1 day, our bankers are magically transformed into a different type of banker. It's just really trying to give people a sense that we have 3 different dials that we're turning. Number one was to attract the best-in-class talent and to have truly differentiated capabilities. We were there early by all of the hiring that we did. The second was to have, in quantity, a footprint that was meaningfully greater than the predecessor company. That we now have finally done, as we have rebuilt the business. But we still are relatively small compared to many of our peers, so there's tremendous opportunity there. The third dial is, having those bankers be on this platform, every additional day makes them more integrated, more cohesive and gives them opportunities to be in more dialogue. So it's really that, that I expect to continue to see progress on. And as we look at waves of bankers, there's no doubt that those who are here earliest are announcing the most deals, but those that may be behind them have secured very attractive mandates, and it's just a matter of those working their way through the system. And I'm confident that the individuals who were attracted to the platform are flourishing on this platform. But it will take time until all of the traction that they're getting is fully recognized in our P&L. And as I've said previously, I manage and see this business with all the leading indicators; we report our results, which are all lagging indicators. And that's some of the challenge in communicating properly the progress and the momentum that we have, because one is forward-looking and one is, by definition, backward-looking.

Understand that. The -- and you did give kind of forward-looking, the year-over-year Restructuring pipeline. I'm wondering if you can comment on the Advisory pipeline?

The number of mandates continues to grow meaningfully. We're securing a -- an ever-larger number of mandates in an evermore diverse group of industries in an evermore broad series of geographies. The quality of the mandates, the quality of the companies continues to build. But like everything else, if you have a trusted adviser relationship, what's most important is to be their trusted adviser. And once that's in place, there are a lot of externalities which will determine the timing and the ultimate outcomes. And our goal is to be trusted advisers to an ever-increasing set of important clients around the globe. And on that, we're making great progress. When and how that all shows up is really just part of the game, which is, we've got to give the best advice. And I know that, ultimately, the more client relationships that we have, the more intimate those relationships are; inevitably, very good things will come out of that.

The next question comes from the line of Sumeet Mody with Sandler O'Neill.

Maybe, just one on -- one quick one on the hiring trajectory in 2018. You guys have made some good strides over the last couple of years, and I know you're focused on being kind of slow and deliberate with overall level partner -- levels of partner hires. But with all the white space in front of you, is there any particular sectors in Strategic Advisory you'd like to focus on in 2018 or see more opportunities than another that you're kind of not already outsized in?

Look, the invigorating thing about this is, there's so much more to play for. And inevitably, we're going to get to all the geographies and all the industries. We're just not to going to do it overnight. So it is almost entirely focused on finding best-in-class bankers who are the right cultural fit and then building around them. There are many segments where there is going to be a lot of activity. But what we don't want to do is chase a short-term opportunity and compromise our standards or to bring people on to this platform who aren't the right fit. And what we're very, very proud of is the caliber of the individual who's come on, their ability to thrive on this platform and our ability to develop a truly differentiated and beneficial culture. So the short answer is, we're looking almost in every direction. And even where we have strength, we're going to try and go from strength to strength. And where we don't have a presence, we want to make sure that if we make an addition that we can then follow that up with other additions, so that we can achieve the requisite critical mass to properly serve our clients. So that unfortunately leads to a vague answer, because that's sort of how we approach this business.

The final question comes from the line of Jim Mitchell with Buckingham Research.

Maybe just on the placement revenue outlook. I appreciate that your commentary that you've been investing on the real estate side and secondary side. But I guess, I'm just trying to get a sense of what's been the drivers over the last couple of years. That revenue stream has been sort of flattish -- flat to down. But you seem a little more confident going forward. And sort of how do we think about, I guess, what's been driving it, and what gives you some confidence that things should get -- look better?

I think what we said before was, this year all of the Park Hill business was up, and 3 of the 4 verticals were up; and that even though the real estate environment was quite challenging, even with that being down significantly, overall was up. And we also said that we've now delivered on the Advisory -- the secondary advisory business performance that was better than not just '16, but also '15. That is a business that really does lend itself to being part of the integrated effort of our firm, as does the real estate business. And we've made major investments on the Strategic Advisory side, both with best-in-class real estate bankers, but now a more dedicated and focused sponsors effort, that I think among other things, what you'll see is that these 2 businesses will be much better integrated into our overall firm and just by dent of that become much more powerful.

Okay. No, that's helpful. And just maybe on the non-comp side, it seems like you guys have done a very good job of sort of holding the line there. Should we -- as you further expand, do you still think you have the capacity to add people without much movement in the non-comp? Or at what point do you think you start to have to add offices or anything like that?

I think, as we've talked about before, approximately 2/3 of our non-comps are fixed or semi-fixed. And so on the variable side, which is mainly travel-related and client entertainment, client development, we expect that will increase as headcount increases. But I think on the fixed side, just on the space, we actually feel pretty good about the amount of space we have. We actually have some space that is currently sublet, that will come off as our headcount grows. So on the fixed side, we think that will grow at a slower pace than our headcount.

Well, if there are no other questions, thank you all for joining us this morning. And we look forward to speaking with you in our next earnings call. Thank you.