PJT Partners Inc (PJT) 2018 Q3 法說會逐字稿

A very good day to you all, and welcome to the PJT Partners Third Quarter 2018 Earnings Call. (Operator Instructions) I'd like to advise all parties that the call is being recorded for replay purposes.

I would now like to hand the call over to Head of Investor Relations, Sharon Pearson. Please proceed..

Thank you very much. And good morning, and welcome to the PJT Partners Third Quarter 2018 Earnings Conference Call. Joining me today is Paul Taubman, our Chairman and Chief Executive Officer; Helen Meates, our Chief Financial Officer.

But 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 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. Thank you all for joining us today. For the third quarter, we generated revenues of $140 million versus $78 million a year earlier. For the 9-month period, our revenues were $405 million, up 31% compared to the prior year, with Advisory revenues up 37%.

Looking at our third quarter results in greater detail. Firm-wide revenues rose 79%, with Advisory revenues up 94% from year-earlier levels. Strategic Advisory, Restructuring and Park Hill all generated higher revenues for the third quarter and the 9-month period compared to year-ago results. These businesses also showed sequential growth from the second to the third quarter of this year.

Turning to each of our businesses in a bit more detail. In Restructuring, our leading global Restructuring franchise grew its revenues in both the quarter and 9-month period compared to prior year levels and continues to benefit from close collaboration with Strategic Advisory. As our Strategic Advisory business grows in scale and scope, it makes our Restructuring business all the more powerful, enabling our Restructuring business to maintain its financial performance in the face of historically low default rates.

Overall, our global Restructuring franchise continued its leadership position for 2018 year-to-date with top rankings in announced restructuring both globally and in the U.S. While our fourth quarter Restructuring revenues will be down relative to year-ago levels due to difficult comparisons, we expect full year Restructuring revenues to be flat to only modestly below 2017's results.

Turning to Park Hill. Park Hill revenues rose significantly for both the quarter and the 9-month period versus year-ago levels, driven by real estate and secondary advisory, where we have made sizable investments. Over time, we expect the breadth of client relationships across the firm to enhance Park Hill's growth opportunities in all of its verticals.

Turning to Strategic Advisory. In Strategic Advisory, our revenues grew substantially for the quarter and for the 9-month period compared to last year. As our roster of senior bankers and our coverage footprint continues to grow, we find ourselves advising a rapidly expanding number of corporate clients around the globe. We are increasingly representing some of the most recognized and most respected companies on matters of great consequence who are drawn to our differentiated, best-in-class advisory capabilities.

As our footprint expands and as our brand gains traction, we have seen a significant increase in our preannouncement or shadow pipeline of transactions.

Our Strategic Advisory partner count increased to 34 at the end of the third quarter, a 26% increase compared to year-end 2017. That number now stands at 37 partners, reflecting the CamberView acquisition. While our Advisory partner count has increased considerably, almost half of our Strategic Advisory partners are still relatively new to the firm, having joined within the past 2 years. We remain in active dialogues with numerous senior candidates, and as been our practice, we'll continue to hire on a year-round basis.

This is our first opportunity to speak in some detail about our CamberView acquisition, which closed on October 1. Bringing CamberView into our firm aligns well with our strategic priorities. It complements our already formidable capabilities and scale and expands our footprint.

The investor landscape is rapidly evolving, with an increase in shareholder activism globally and the continuing migration from active to passive managers, combined with the growing influence of governance teams within the largest asset managers. This significant trend has resulted in greater focus on corporate governance and ESG issues for companies everywhere and has increased the importance of understanding investor mindsets as companies confront a complex array of strategic and operational decisions. The CamberView team brings many years of leadership experience from some of the largest fund complexes and leading governance advisory firms, including BlackRock, Vanguard, Wellington, Fidelity, State Street, ISS and Glass Lewis. This expertise will enable us to provide unparalleled advice on important matters to boards and management teams around the globe. The addition of CamberView solidifies our differentiated expertise in all aspects of shareholder engagement and activism response.

CamberView also brings with it a highly attractive footprint with almost 200 public company clients, including nearly half of the Fortune 100. This instantly expands the breadth of clients we touch, both here and abroad. This combination is as compelling culturally as it is strategically. CamberView's focus on serving clients with best-in-class talent and with trust, integrity and teamwork is completely aligned with our core values.

The leadership of CamberView has been known to us for years and, in some cases, decades. Our history with CamberView's CEO as well as its Executive Chairman dates back to well before PJT was even a concept. These relationships have facilitated a smooth and seamless integration and enabled us to get off to a very fast start.

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

Thank you, Paul. Good morning.

Beginning with revenues. Total revenues for the quarter were $140 million, up 79% compared with the third quarter 2017. The breakdown of revenues: Advisory revenues were $117 million, up 94% year-over-year, with significant growth in Strategic Advisory, secondaries and Restructuring. Placement revenues were $18 million, up 15% year-over-year. The increase in placement revenues was driven by higher closing volume in the real estate vertical. Other revenues included $2.3 million in reimbursable expenses that we billed to clients during the quarter.

For the 9 months ended September 30, total revenues were $405 million, up 31% compared with the same period last year. And the breakdown of 9-month revenues: Advisory revenues were $319 million, up 37% year-over-year, with significant growth in Strategic Advisory and secondaries and solid year-over-year growth in Restructuring. Placement revenues were $72 million, up 5% year-over-year. Other revenues for the 9 months included $6.7 million in reimbursable expenses that we billed to clients during the period.

Turning to expenses. Consistent with prior quarters, we've presented the expenses with certain non-GAAP adjustments, which are more fully described in our 8-K. In the third quarter, adjusted compensation expense continued to be accrued at 64% of revenues.

Adjusted non-compensation expense was $27.3 million and included approximately $2.6 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 non-compensation expense was $24.7 million, up 2% year-over-year. And this $24.7 million total expense includes approximately $1.7 million in expense relating to the CamberView acquisition.

For the 9-month period, excluding year-to-date reimbursable expense of $7.2 million, our adjusted non-compensation expense was $72.2 million, up 6% year-over-year, again, including CamberView costs.

Turning to adjusted pretax income. We reported adjusted pretax income of $23.1 million for the third quarter, up from $4.1 million last year; and $66.3 million for the first 9 months 2018, up from $43 million for the same period last year. Our adjusted pretax margin was 16.5% in the third quarter and 16.4% for the first 9 months.

The 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 22.2%. Now given the first half rate applied was 22.1%, we adjusted the third quarter rate accordingly to 22.3%.

Earnings per share. Our adjusted if-converted earnings were $0.44 for the third quarter compared with $0.10 in the third quarter last year; and for the first 9 months, $1.30 per share compared with $0.75 in the same period last year.

The share count. For the quarter, our weighted average share count increased by 790,000 shares to 40.62 million, which principally reflects the full quarter inclusion of 1.25 million of performance units and is partially offset by continued share repurchases. During the third quarter, we repurchased approximately 187,000 shares through open-market purchases. The share count does not include approximately 1.73 million shares that were issued in connection with the CamberView transaction. Those shares will be reflected in our fourth quarter share count.

As we've discussed on prior calls, partnership units can be exchanged -- can be offered for exchange 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 493,000 partnership units, and we intend to exchange those units for cash. The upcoming exchange plus open-market purchases and net shares settled through the end of the third quarter represent repurchases of approximately 2.5 million share equivalents.

On the balance sheet, we ended the quarter with $192 million of cash, cash equivalents and short-term investments. As part of the CamberView acquisition, we elected to take advantage of a $30 million term loan, and we reduced the amount of our undrawn revolver by $20 million.

Finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on December 19, 2018, to Class A common shareholders of record on December 5.

I'll now turn back to Paul.

Thank you, Helen. Now turning to our outlook. We are still so early in the build-out of our Strategic Advisory business that we have a tremendous opportunity to take market share and build a meaningfully larger Strategic Advisory franchise almost regardless of market environment. In building out our Strategic Advisory business, we have consciously aligned it with a broad-based set of Advisory capabilities, including leading Restructuring and fundraising businesses and now enhanced by the leading shareholder engagement franchise.

Overall, we continue to be very pleased with our firm's overall progress and with the contribution of each of our businesses to the overall strength and stability of our franchise. We are confident that we have the right suite of capabilities to best serve clients and that we are well positioned to take market share and grow in almost any market environment.

And with that, we will now take your questions.

(Operator Instructions) We have our first question. It's from the line of Devin Ryan from JMP Securities.

I guess first question here. I heard the comment on the shadow backlog increasing significantly. I just want to clarify, first, is that business that you've been mandated on but is just yet to be announced kind of into the public domain? And then, if you can, any other context around what the client list of the firm looks like today relative to a year ago? I know, obviously, as time goes on here, you have more bankers that have been on the platform for a couple of years, so I'm just trying to get some flavor for kind of how the client list is developing and then maybe, if you can, even kind of where you're seeing some momentum from a sector perspective.

I think, Devin, as I had mentioned previously, this is a migration from being in active client dialogues to client mandates. Client mandates often but not, by any means, all of the time lead to announced transactions. Announced transactions lead to completions and booked revenues. And as our number of advisory partners continues to build, particularly for those who are in their early days, what we're seeing is significant traction and take-up with clients, the awarding of mandates. And it's changing shape in the sense that as we have bankers in more and more industry verticals, we're seeing a broader mix of mandates across industry verticals. As we continue to build out our European franchise, we're seeing additional traction in Europe. And as our brand becomes better known, as we're in front of more Boards of Directors, advising more C-suite executives, I think we're benefiting from that word-of-mouth. So what we're just trying to capture, and I've said this many times, is -- we report out on a lagging basis in terms of revenues, and yet, we manage the business based on leading indicators. And not surprisingly, now that we've been at this for 3 years with a broader array of very talented senior bankers and we're better known to clients around the globe, we're seeing that in terms of the number, the quality, the revenue opportunity, the complexity, all of those elements on a forward-looking basis.

Okay, terrific. Maybe a bigger-picture one on the environment. Obviously, a lot of talk this earnings season around the volatility of the market and whether economic growth is slowing and whether that could have an effect on M&A activity. Yet, it seems, at least historically, that you need pretty sustained period of volatility to really have a lasting effect. So I'm just curious what you're speaking to strategics about today, meaning has anything shifted even over the last month or so with this volatility? And then kind of second part to that is financial sponsors, which I know are an important client listed of your firm, have over $1 trillion of dry powder, which is a record level and well above kind of the prior cycle peaks. So I'm just curious kind of how that also is factoring in here in terms of just the ongoing outlook, just to the extent sponsors should remain active kind of through even periods of volatility because they have a lot of dry powder in kind of their business models to transact.

Well, I think you've mentioned volatility and the potential for slowing growth, and I think they're really 2 different factors here. Volatility is not the friend of the M&A marketplace. So when you have whipsaws in equity valuations on a daily basis, it just makes it more difficult to get grounded and to agree to fair valuations, but volatility tends to be more short term in duration. So from our perspective, if you're going to continue to see heightened volatility, I think it incrementally makes getting deals more difficult to get done and makes them more challenging. But over the longer term, it's not at all clear that the volatility that we're seeing today will itself persist for an extended period of time. I think the bigger issue is whether or not this economy is slowing, and there's a whole host of economic data to suggest that it isn't. There is, in any dataset, some information which is a bit cautionary. From our perspective, we step way back. We've always maintained that the M&A business is in a secular growth because companies, all else equal, in any given economic cycle, are more likely to transact and to transact with higher frequency than they would have previously. And we've talked about all of those reasons. But we've also said that our M&A business is not immune or any M&A business is not immune to business cycles, and we are reasonably long in the tooth on this economic expansion. So my sense is it continues for some period of time, but it doesn't continue indefinitely. And therefore, we should expect cyclicality and maybe a regression to the mean in M&A. But our business model is not predicated on needing any of that to be successful. Our business model is predicated on having a suite of businesses that can uniquely serve clients to have a relatively small stable of supremely talented bankers who are demonstrating day in and day out that they can claim market share. And therefore, I think, unlike other firms, we don't spend nearly as much time trying to prognosticate about the macro, and we are trying to build our firm in the micro one client at a time, word-of-mouth, successful engagement and to build the brand in a very deliberate manner. Now as far as -- I think you asked another question about sponsors. Sponsors do have an enormous amount of dry powder. My sense of sponsors is while they have an enormous amount of dry powder, just because they have it, it doesn't mean they go out and spend it. Over time, like everything else, as the money does get mostly put into play -- and increasingly, we're seeing the financial sponsors use more creative ways to invest capital, which is either in less than a direct control investment. Some of it has moved into growth equities. Some of it has moved into long-term, lower-return, lower-risk, more stable core holdings. And as they broaden the ways in which they deploy capital, I think that will make it easier for them to deploy that capital. So we're very focused on financial sponsors. I think in the last few months, we've added 2 very senior bankers to lead our financial sponsor coverage effort. And when you think about all the ways in which our firm intersects with financial sponsors, whether it's to restructure the occasional portfolio company that may have run aground, whether it's to help them with fundraising or to think creatively about their LP structure or their GP structure or whether it's to bring them best-in-class advice, we've always believed that, that's an important -- an increasingly important area for us

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more dividends being paid as our investment pays off.

Great. And then just last one here on the CamberView transaction and yes, the closing of the deal. We have our estimates for contribution, but we would love to just get some additional context. Clearly, a number of complementary elements of the transaction. So we see the merits, and the revenue synergy opportunities for the firm also seem clear but maybe hard to parse through on the outlook. I'm just looking for some sense of, if you can, how trailing production or margins of that business compare to PJT. I've just gotten some questions since the announcement. And I know you're not running the firm in kind of separate groups moving forward. But bringing this large team in, how does that affect, if at all, kind of the longer-term operating margin potential of the company? Is it enhancing? Does it attract because you're bringing in, I guess, expense that will add to revenues but may be negative on margins? So trying to think about it holistically and just how that will contribute financially to the firm.

I mean, I think if you don't give any credit to all of the combination benefits, which we think are substantial, it's accretive to our margin.

We have our next question from the line of Mike Needham from Bank of America.

The first I've got is just a clarification point on the comments you made on the shadow backlog. When you're saying significant growth, what time period are you thinking about? Was that significant growth versus this time last year, versus the last earnings call? Just trying to get a context.

It relates to 1 year ago. Just to try -- because it's hard to look week-to-week, quarter-to-quarter, but if you look year-to-year, you can start to see the progress of a firm. And we've always said that we -- while we report quarterly and we enjoy these conversations with you all, we clearly do want to build this for the long term. So we try and look at longer-term metrics, and I was referring to a year ago.

Okay, got you. And for the Restructuring business, I heard the comments on the fourth quarter outlook and the full year. How strong was that business this quarter? And do you think it's kind of still operating around a trough run-rate level, barring any change in the environment? I don't know if there are any quantitative metrics that makes sense to share for that business, like level of retainers or trend in mandates or anything like that.

I think the Restructuring business has been relatively stable post that pop that was due to energy prices collapsing and a big level of activities. So since we've been operating at these levels for multiple periods and multiple years, our presumption is it may not be trough, but it's a lot closer to trough than it is to peak. And we see a lot of signs that if we look out a couple of years, this Restructuring business is going to be meaningfully more active than it is today. And the fact that we've been able to keep it pretty close to flat, with near record-low default rates and such benign credit environment, gives us confidence that we're in a very good spot here.

Okay. And for the CamberView acquisition, if we're not getting the historical financials today, when will we get that?

We'll be providing some more thoughts on pro formas in the next month or so.

Okay. And last one just on CamberView. I'm just trying to get a sense for -- specifically for revenue synergies. How do you anticipate their people are going to work with your Advisory bankers? Will they like physically join them for meetings with corporate clients? Or will it be more of a kind of independent stand-alone business and the revenue synergies come from kind of a referral business?

No, it's a highly integrated effort. There will be certain clients and certain of their expertise where there won't really be a desire or a need to change anything. And they spend an awful lot of time with their clients on a whole host of governance matters, and there'll be many issues where the client would be better served by having a larger, more integrated team working together. So they're going to be colocated with us and really a part of our fabric. So we see this as another weapon in our arsenal, and it's just enhancing our ability to serve clients. And as you can imagine, depending upon the dialogue or the needs of the clients, very little may change, and we'll just continue to serve them with best-in-class execution with the core CamberView team. There'll be many instances where clients will want the broader, more integrated approach, and like everything else, we're going to be driven and guided by our clients. I mean, that's what sets this firm apart. We have all of these capabilities, all the ways in which we can support our clients. But at the end of the day, it's what the client needs are and how they wish to be covered. And our belief is, based on the early feedback, that a large number of CamberView clients are quite in sync with the broader opportunity to better serve them. And at the same time, virtually all of the PJT clients view this additional capability as incredibly accretive to their existing client relationships.

We have our next question from the line of Sumeet Mody from Sandler O'Neill.

Just wanted to get a gauge of your repurchase appetite going forward. Taking a look at cash and investments. Looked again in the second quarter at roughly $121 million, this quarter at $192 million, spent $35 million of cash on the acquisition. Considering the share price move we've seen thus far in the fourth quarter, along with the timing of the deal close, while some -- vesting of the shares with service and market condition, I just wondered how all that was kind of informing your strategy around repurchases going forward.

Well, I think the first indication of that is we were presented with nearly 0.5 million units for exchange, and we've elected to continue our repurchase of them for cash. So we're going to repurchase in short order nearly 0.5 million units. So I think that gives you a pretty good sense as to how we think about our stock and our willingness to put capital behind it.

We have our final question. It's from the line of Jim Mitchell from Buckingham Research.

Maybe just a question on -- back to Restructuring. We have interest rates backing up. We have record levels of leveraged loans. Do you see any near-term opportunity, as rates potentially back up further, for that business to pick up over the near to immediate term? Or is it still, "Hey, we kind of need to wait for the cycle before we get that kind of an opportunity to grow the business again?"

I think this is the micro and the macro. And what we have seen over the last few years is there are meaningful pockets of distress that are disproportionately affecting certain industries and that those industries that are being disrupted with meaningful dislocations are finding themselves in need of major restructurings. And that's why with a very benign macro environment, you saw a big wave of energy restructurings. You're seeing a big wave of retail restructurings. There's a big wave of technology restructurings. There is a wave of pharmaceutical restructurings, specialty pharma and the like. So that continue -- migration from one industry to another, we don't expect to stop, and I think that's one of the things which has enabled the set rate for Restructuring activity to be higher in this macro environment than it has been in past. At the same time, one of the things that keeps companies from needing to restructure is incredibly accommodating capital markets. And as refinancing opportunities dry up and as the cost of refinancing gets higher, you see stress in the system and you see an acceleration of that day of reckoning. And there are -- in any macro environment, there are significant number of companies and/or industries that are hobbled. And I think this volatility, the fact that money is likely to be less available and when available, at a higher cost just means that, over time, Restructuring will turn. One of the great luxuries of this firm is we don't spend a lot of time focused on where the macro is going because if we build the right micro, we're going to be able to deliver significant growth, repeatable growth for quarters after quarter after quarter to come. And that's how we think about it. But certainly, if you said to me to look out some number of years as opposed to some number of quarters, I have to believe, for a variety of reasons, that the level of restructuring activities should grow significantly, not least of which is the quantum of paper that's out there that would need to be dealt with is just massively larger than it was a decade or so ago.

Yes, absolutely. Okay. And then maybe another question on -- a follow-up question on the buyback capacity. I just want to make sure I understand. I mean, I guess, number one, you have $100 million authorization. I think that's just for Class A shares. That doesn't necessarily apply to partnership unit repurchases. Is that right, I guess, is the first question. And then, I guess, what is sort of -- question number two, what's sort of the limit of your capacity? Is there a certain cash level that you don't want to go below? How do we think about your capacity to do more exchanges?

Okay. Well, I think the first is we view the exchanges as separate from the open-market repurchases. The board granted us the authorization. It's still got meaningful room. And if we get toward the end, we'll revisit that. And on a quarterly basis, when exchanges are presented to us, the board makes a decision quarter by quarter how to settle those. And continuing with past practice, we're going to settle this in cash. I think it's fair to say that we are big believers in our stock. We're big believers in making sure that we contain any dilution that occurs from value-added growth. But at the same time, we also want to be disciplined and make sure that we don't commit dollars beyond our means. And right now, we're very comfortable with that. But you should know that you have a conservative but forward-leaning management team, conservative in financial policy but forward-leaning in being prepared to commit resources to buy stock at what we believe to be compelling values.

I think, with that, we will close this call. And we look forward to speaking with you on our next quarterly review. Thank you all for joining.

Thank you.