PJT Partners Inc (PJT) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to PJT Partners' Second Quarter 2018 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 PJT Partners' Second Quarter 2018 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' 2017 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 reconciliation, 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. Good morning, everyone, and thank you for joining us today. For the second quarter, firm-wide revenues were up 20%, with Advisory revenues up 34%. And while this is a quarterly report, we measure our progress in years, not quarters.

However, with these 6-month results, the full-year contours are beginning to take shape. Year-to-date firm revenues were up 15% versus year earlier results, driven by solid gains in Strategic Advisory, secondaries and Park Hill real estate. These results are all the more satisfying as year-to-date Restructuring revenues are essentially flat from year ago figures, given the benign credit backdrop.

Turning now to our businesses in a bit more detail. First in Restructuring. As I mentioned, our half-year 2018 Restructuring results were essentially unchanged from year ago levels, reflective of low overall default rates. However, our second quarter Restructuring revenues were up sequentially due to an increased number of closings. We continue to expect 2018 full year Restructuring revenues to be essentially flat, relative to 2017 results. Our Restructuring book of business is highly diversified with energy power, consumer retail, TMT and healthcare, continuing to be significant areas of activity and focus.

We continue to be recognized as a leading restructuring firm, and for the first 6 months of 2018, PJT Partners was ranked #1 in announced restructuring transactions. As our Strategic Advisory business scales, we are benefiting from a broader base of potential clients, the ability to engage with these clients at earlier points in their decision-making processes, and most importantly, enhanced win rates.

Turning to Park Hill. While Park Hill was down modestly in the second quarter versus a year ago, the business is up year-to-date consistent with overall firm performance. This growth was largely driven by secondary advisory and real estate, two verticals we have previously identified as particularly benefiting from closer coordination and integration with Strategic Advisory.

For full year 2018, we expect the real estate and secondary advisory verticals to be the principal drivers of Park Hill's growth.

Turning to Strategic Advisory. In Strategic Advisory, we continue to invest by hiring best-in-class talent. We ended the second quarter with 33 Strategic Advisory partners, up 22% since year-end, up 43% from year-ago levels, and up 83% since spin. Our hiring pipeline remains robust and we are in advanced discussions with a number of high-impact senior bankers. Overall headcount in Strategic Advisory has also increased significantly, up 14% from year-ago levels, and up 89% since spin.

Our ever-expanding coverage footprint and capabilities have enabled us to broaden our engagement with a growing number of clients. We are advising a steadily increasing roster of blue-chip clients on important strategic matters. Our current mandate count continues to trend higher and is up meaningfully year-over-year, as is the dollar value and number of announced transactions.

Of note, our broad-based highly integrated, highly connected global network has emerged as a differentiating factor for our firm on large, complex, cross-border transactions. We are confident that the strong foundation we have put in place will enable us to capitalize on all of the positive momentum we see in our business. And with that, I'll turn the call over to Helen to review our financial results.

Thank you, Paul. Good morning. Beginning with revenues. The total revenues for the quarter were $131 million, up 20% compared with the second quarter 2017. For the breakdown of revenues: Advisory revenues were $98 million, up 34% year-over-year, with growth in Strategic Advisory, Restructuring and secondaries. Placement revenues were $28 million, down 16% from the same period last year, with the decline in placement revenues driven by lower closing volume in the private equity vertical, partially offset by increased fundraising closings in real estate. Other revenues included $2.1 million in reimbursable expenses that were billed to clients during the quarter.

For the 6 months ended June 30, total revenues were $265 million, up 15% compared with the same period last year. The breakdown of 6-month revenues: Advisory revenues were $202 million, up 17% year-over-year; placement revenues were $54 million, up slightly year-over-year; and other revenues included $4.4 million in reimbursable expenses that were billed to clients during the period.

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. Adjusted compensation expense continues to be accrued at 64% of revenues. Adjusted noncomp expense was $25.6 million and included approximately $1.9 million of expense, which is billable to clients and was historically recorded on the balance sheet.

On an apples-to-apples basis, excluding the impact of the change in accounting for this expense, adjusted noncompensation expense was $23.8 million, up 3% year-over-year. And for the 6-month period, excluding year-to-date reimbursable expense of $4.6 million, our adjusted noncompensation expense was $47.5 million, up 8% year-over-year.

Turning to adjusted pretax income. We reported adjusted pretax income of $21 million for the second quarter, up from $16 million last year, and $43 million for the first 6 months 2018, up from $39 million for the same period last year. Our adjusted pretax margin was 16.4% in the second quarter and 16.3% for the first 6 months.

Now provision for taxes. As with prior quarters, we've presented our results as if all partnership units had been converted to 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 related to the delivery of vested shares at a value higher than their amortized cost. This benefit has been incorporated in our annualized rate, resulting in an estimated effective tax rate for the full year of 22.1%. And given the first quarter rate applied of 22.3%, we adjusted the second quarter rate accordingly to 21.9%.

Earnings per share. Our adjusted if-converted earnings were $0.42 per share for the second quarter, compared with $0.27 in the second quarter last year. And for the first 6 months, $0.89 per share compared with $0.65 in the same period last year.

On the share count for the quarter, our weighted average share count was 39.8 million shares, and during the second quarter, 1.25 million performance units satisfied the $55 share price condition. Despite the fact that the time-vesting conditions have not been met for 1 million of these units, the full 1.25 million will be reflected in our weighted average share count in the third quarter.

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 to date, we have settled all exchange requests in cash. We're currently in receipt of exchange notices for approximately 256,000 partnership units and we intend to exchange these units for cash. With this upcoming exchange, we will have repurchased the equivalent of approximately 1.8 million shares year-to-date.

On the balance sheet, we ended the quarter with $183 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 September 19, 2018, to Class A common shareholders of record on September 5.

I'll now turn it back to Paul.

Thank you, Helen. Now turning to our outlook. We are unwavering in our commitment to build out a leading global, Advisory focused investment bank. Behind the scenes, there has been an extraordinary amount of hard work involved in laying the foundations of our company.

As we rapidly approach the 3-year mark, we are now seeing the first tangible benefits of that investment. Our leading Restructuring franchise is enjoying strong, relative commercial success. Our Park Hill business is increasingly positioned to capitalize on a variety of strategic growth initiatives. And our Strategic Advisory franchise is rapidly growing its roster of clients, mandates, announcements and completions.

All of this progress is occurring against a backdrop of a culture that is differentiated by its focus on teamwork and collaboration as well as excellence in client service. We remain optimistic about our growth prospects for 2018, 2019 and beyond. And with that, we will take your questions.

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

I guess first question here is, you touched on the real estate and secondary advisory areas of Park Hill are better leveraging the firm's capabilities. I would love to just get a little bit more perspective of where do you think you are relative to maybe what that synergy could be just given that it is still, kind of, early days of leveraging those capabilities.

And then, if you can, just anymore perspective or anecdotes on what's different today and why that's working, and why you're excited there.

Well, I think you said it yourself. It's early days. And we've always maintained that the Park Hill business is a real jewel of a business that connects very well to our other businesses.

And when you think about their broad base, their web of relationships and their connectivity to hedge funds, private equity funds, and within hedge funds, credit funds, and emerging market funds and their global distribution network, there are so many ways to tap into it.

If you think about the secondary space, we now have a front-end origination business, which is touching more and more financial sponsors. So those businesses, which always had a strategic logic to work closely together, now have a front end that is better built out, more developed and is creating some tremendous tailwind to that business.

And in a similar vein, we have a leading real estate banking franchise and being able to connect that together just means that there's more joint client presentations, more cross staffing, more opportunities for there to be idea generation and for us to better serve our clients. So I think we are in the early days, and it's something that we've talked about from the beginning. But now, 3 years in, we're beginning to see some of the tangible rewards of the hard work that we've put into this effort.

Okay, terrific. Great color. Second question here, just on the recruiting and some of the commentaries, you added one new partner in the quarter. It sounds like a lot of conversations that you've been having are ongoing.

So I know you can't necessarily pick the date that everybody joins, but I'm curious if you have a sense of whether we should still expect a fair amount in the back half of this year or just given, kind of, where we are in the year that timing probably pushes more towards early next year. Just trying to think about some of the timing there.

I think we've been consistent that we are a 365-day-a-year recruiting firm and that we are not particularly tied to the calendar. We are tied to identifying the right individuals, making sure those individuals are not only the right fit, but are really committed to this platform. And then, we're just trying to be opportunistic.

If you look at where we were last year, we ended up with -- I think, more of our partner hiring was in the second half of the year. I think there is no commitment to that, but I certainly would not be surprised if we ended up with a back-half-weighted recruiting calendar. And that's just, sort of, the way it is.

We've always said that our hires are more likely to come in clumps as opposed to regular way, one per x number of weeks or months. And we are highly confident that the firm and its story is resonating, and we are deep in discussions, and, inevitably, we'll have additional partner additions, which will just enable us to take the franchise to yet another level.

Okay. Great. And just last one here, maybe a little bit higher level. Just love to get maybe some broader strokes on, kind of, the M&A markets that you're currently seeing. And really just, what are the biggest themes that your clients are asking you about or are focused on, in both U.S. and Europe?

And then, where do you still think the runway is greatest in the cycle or where does it at least feel like today? I know that's, kind of, a big question of where we are in the cycle and PJT isn't necessarily going to be connected to the cycle, but I'm curious your views since that, kind of, macro overlay still affects the company.

Yes. Maybe -- let's start with the second half of that first. I think there is clearly a long-term secular change, where M&A as part of the toolkit is going to be used with ever-increasing frequency.

And as a result, what everyone thinks of a steady-state level of M&A, and if one wants to peg it to values as a percentage of global market cap or global GDP or any of those benchmarks, whatever your set point was 5 or 10 years ago, we believe with great conviction that, that set point is higher and will remain higher.

Because as the world speeds up, more dislocation managing in a changing world, that requires clients to respond, and to be more proactive in managing their portfolio and to constantly ask themselves whether or not they have the right suite of products and services? Do they have the right capabilities? And has the world changed in ways that may cause them to rethink some of the assets they currently own? So that is not in our mind going to change, and we see that as an up and to the right type of trend.

At the same time, this is a deeply cyclical business. And we are dealing with, if not perfect launch conditions, we're dealing with pretty good macro conditions. When you think about global GDP growth, when you think about benign interest rate levels, tremendous access to capital, high valuations in the equity markets, that inevitably will change and those conditions will be less hospitable.

And when they do, there is no doubt that there will be a contraction in M&A. So I think there's probably more downside than there is upside in the near term, just because we are operating at reasonably strong levels.

But having said that, the levels that we're operating at today are sufficiently deep that even if one were to pull back from that any reasonable percentage, you are still dealing with a very robust M&A market by historic trends and historic levels. So that's sort of a macro backdrop.

The micro for us is, we don't spend a lot of time on that because ultimately, we are much more of a market share than a market growth story. We don't need the market to grow. We can grow our Advisory business in a contracting M&A marketplace. Because as the brand is better established, as we have more and more foot soldiers, as our coverage footprint builds out and our capabilities continue to fill in, we become increasingly competitive in a competitive world.

So what we're focused on and what others may be focused on are perhaps 2 different things. And I think on the first half, do you want to just go back? Is there a particular point you'd like me to go back on in the first half of your question?

Yes. Essentially I'm just trying to get some flavor for -- in the conversations that you guys were having with these, kind of, important companies globally, what the themes are in those boardrooms or, kind of, where are they focused most?

And is it that world speeding up? And do we have the right mix of assets? Is it uncertainty geopolitically or I guess where are they focused? And, kind of, what's either driving their enthusiasm or maybe creating some restraint in doing something?

Yes, like every -- there may be a macro backdrop, but at the end of the day almost every corporate decision is made on micro terms as to what's the competitive set for any individual company? What are the competitive threats? Are there attractive targets? Are there ways in which their business can be either defended or can head to another level? So it gets very micro in the boardroom, although it all gets rolled up to a macro trend.

If there is one trend I would say that increasingly companies are focused on, it is in a world in which there is such severe dislocation and managing through that change requires a pivot with one's business model or to think about inorganic growth in ways that they hadn't thought about before.

When it involves larger companies, by necessity the targets get larger and larger. As the targets get larger, it's rare that one finds a perfect fit because large complex organizations don't necessarily fit perfectly with one another.

So I think there's a lot of discussion about what's the actionable set of a potential merger or acquisition candidate? How well do they fit? And the larger the transaction, the more regulatory scrutiny, the more that one is at the mercy of regulatory authorities, not just in their home market, but around the globe.

And as there is ever-increasing time to close from announcement to closing, now you have to then inject the whole issue of whether or not the valuation that's struck at announcement can hold for an extended period of time. And with shareholder votes that oftentimes are back-end determined, you end up with lot of externalities, and trying to land the plane on an announcement to a closing is more challenging in the current environment than it's been.

And all of those issues feed upon one another. More regulatory scrutiny, which in turn is a function of the targets are getting larger, so you have larger targets inviting more regulatory scrutiny. You have a less coordinated regulatory regime around the globe. So every sovereign is looking at all of these competitive combinations through their own government lens, which then creates longer periods of time between announcement and closing, which then means valuations are constantly moving in a changing world.

Then you have shareholders who are deciding whether or not to approve these transactions. That creates a big burden. And while it hasn't slowed the number of very large transactions, it certainly has made closing many of these large transactions that much more challenging.

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

Just a couple quick clean ups here. Might be more of a Helen question, but we've seen a material impact of ASC Topic 606 on at least one of your peer's results this quarter. Just wondering if you guys caught any of that this quarter or if you'll even be seeing -- be accounting that way going forward or will, kind of, revenue recognition will be dependent more on the date of closing? Any color there would be helpful.

So just looking at our quarter. All the transaction fees that we booked in the quarter for -- were for deals that closed in the quarter. So we didn't have any other timing impacts.

Okay. Great. And then just one on the buybacks. Saw a nice pickup in the quarter. On open-market purchases, just wanted to get a feel if we should get comfortable with this level or is it kind of more market dependent going forward?

Well, I think there are number of tools that we use. The first one that we've talked about is the exchanges. And you noticed in the first quarter the number of exchanges was very high. It was a bit lower in the second quarter. So I think we used both -- sorry, all 3 [niches settle], exchanges and open-market repurchases. So we continue to look for all of those tools.

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

The first one I have is on the Advisory deal trend. The number of clients paying you more than $1 million increased pretty meaningfully in 2016. It was a little bit flatter in 2017. And I'm wondering, are you seeing that pick up again this year?

And then that metric, in general, just the number of clients paying you $1 million or more, is that the right metric to, kind of, track how the Advisory business is progressing?

We don't -- at least, I don't spend that much time focused on that metric, but we're required to report it. So we report it and we do look at that and it does show that there has been an increase in our client base, which in my mind is what one would expect as we continue to build out our footprint. And I've talked repeatedly about the number of mandates. And how our mandate count has increased as well as the number of announcements, our backlog.

So we look at all of those metrics, but I think that's a pretty blunt instrument. So when we think about what are the important KPIs, it's trying to understand how many mandates we have in-house because that's a leading indicator. It's trying to understand the quality of those mandates. The more complex the assignment, the larger the client, all else equal, the larger the fee opportunity is for us.

And we're always looking to see whether or not our coverage universe is expanding? Are we in dialogues with more companies? Are we working with them as a lead advisor? Have we moved up from being given an opportunity to work with a new client to solidifying that experience and becoming an ever increasingly more drawn upon trusted advisor? So it's a whole host, Mike, of metrics that we look at.

And I think -- on all of the leading indicators we look at, we see that we are making significant progress in building out our firm. And it's nice when you have some supplemental data in the financials that are aligned with that, but that's not really the principle basis upon which we manage or change our firm.

Okay. All right. Got it. Then for the Advisory business. I think in your comments it sounded like you have a fairly good idea or at least the rest of the year is starting to -- the full year is starting to shape up.

If Restructuring is going to be, kind of, flat this year, fund placement seems to be growing in the 2 groups that you highlighted. For Advisory, I'm not sure, if I missed it. Is that, kind of, where the growth is going to come from this year? And is the ramp continuing this year based on the strength of your pipeline?

Yes. I think that's fairly said. For the first half of the year, firm-wide revenues were up 15% and the Restructuring business was flat. So the engine of growth has been the Strategic Advisory business.

Now quarter-to-quarter, there will be variability, but that trend should continue to be up and to the right. And as that business continues to mature in scale, we expect to see more and more in not just percentage terms, but absolute contribution from Strategic Advisory. That is the principal growth engine of our firm over the intermediate and long-term.

Right. Okay. And then just last one for me on hiring. Hiring has been really strong with the -- at the partner level and below. As you scale, does it get any incrementally harder to attract people who want to be part of a more start-up like advisory firm?

And then also just broadly on the labor market. Things appear to be getting more competitive, compensation is picking up some. And some of the bigger banks, they are trying harder to retain people. Is that affecting the people that you are after at all or is it not?

No. Look, we have a unique value proposition and that's unchanged. And the individuals who are attracted to this platform see many things in this platform that don't exist elsewhere. And that differentiation is a competitive advantage for us. And we haven't seen that recede it any way, shape or form.

As far as whether or not it slows, as we build out, I think we have a push and a pull here, because as we build out our firm it becomes ever clearer to an ever larger audience that this firm really is building something special. And there's an opportunity for them and that they can win, and really flourish off of this platform.

And the more of our hires that succeed on this platform, the more it's easier for others to independently corroborate just how special the place we're building. But since there are so many areas that we are not in, we still have all the white space.

So as we go into new areas whether it's a new industry vertical, a new product capability, even a new geography, we have this exquisite sweet spot of being more and more established every day of having so much white space in front of us and I think that's what resonates. So in the current environment, we are quite optimistic about our ability to continue to grow and scale our business.

But it's hard work and it's most important to make sure that the individuals that we hire are the right individuals and that they come when they're ready to come. And therefore, it's always going to be lumpy and you're not going to see regular way increases in headcount.

And we also don't think that there is benefit in, sort of, promoting this or putting out endless press releases. We are going to be much quieter about what we do and then on a quarterly basis, we can aggregate or on a annual basis, give you a better sense about just what you're seeing below the surface here.

Your next question comes from the line of Jim Mitchell with Buckingham Research.

Maybe, Paul, I think you alluded to this earlier. How are you thinking about or your clients thinking about the NXP deal? Chinese regulators, obviously, stepping up, potentially. Has that put a chill on large transactions? Or is there -- do you see that as an elevated risk to deals already in the pipeline? How do we think about that, and how your clients are reacting?

Well, Jim, I'd rather not talk about a specific transaction, but I'll talk about some key trends. I don't think it's going to be much of a surprise when I say that I think Chinese investment into the United States is likely to recede dramatically as well as U.S. investment into China until there is a resolution to some of the heightened trade and tariff rhetoric on both sides.

So, inevitably, that will calm down, and when it does, you may see a return to more regular way commerce from a strategic perspective, but in the near term, you have to imagine that that's going to take a very substantial step backwards.

I'm more focused on the fact that large deals are increasingly required if you have a changing world and a lot of the actors are themselves large capitalization companies. Inevitably, many of the targets are themselves going to be large. And as a result, you're starting to see larger and larger players decide themselves that they either don't have the full toolkit, or they need to make a strategic pivot, or they need to change their business model.

And as a result, the pool of potential merger partners, acquisition candidates, many of those companies are getting larger and larger, and as they get larger, you are dealing with 5-into-4, 4-into-3 horizontal consolidations. You're dealing with questions about vertical mergers and regulators have all sorts of different perspectives. So you're just dealing with a complex chess game.

And as you have larger transactions, which are less straightforward to see how they move from announcement to completion, it creates a bit more hesitation in the boardroom. And I think what we see an awful lot is, there is a realization that unless they, meaning the clients, are thinking more boldly about their strategic ambitions, they run the risk of missing out. Yet by being bolder, they are putting themselves in harm's way.

And there's just no getting away from that, and the reality is that time to close has been pushed out. There's probably fewer transactions that get to the goal line and that does give companies pause, but at the end of the day, with full knowledge of that, we are dealing with a pretty robust M&A environment. So I think it's a risk factor, it's something to be considered. But in and of itself, I don't see it as having a chilling effect on the overall M&A market.

As there are no more questions, I think we will adjourn until our next earnings call. Thank you all for your support and speak to you all soon. Thank you.