PJT Partners Inc (PJT) 2021 Q3 法說會逐字稿

Good day, and welcome to the PJT Partners Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sharon Pearson, Head of Investor Relations. Please go ahead.

Thank you very much. Good morning, and welcome to the PJT Partners third quarter 2021 earnings conference call. I'm Sharon Pearson, Head of Investor Relations at PJT Partners. And 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' 2020 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, which is also available on our website.

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

Thank you, Sharon. Good morning. Thank you all for joining us today. Before we review our quarterly results, I wanted to provide some high-level commentary about each of our businesses. This year, strategic advisory, PJT Park Hill and PJT CamberView are all growing significantly and will deliver record performance.

In restructuring, while we continue to be quite bullish on the long-term outlook, the extraordinarily benign credit markets and the unprecedented fiscal and monetary policy support has meaningfully dampened the current restructuring environment. Against that backdrop, our 2021 restructuring revenues will return to 2019 levels.

As we discussed previously, last year's record third quarter restructuring results present us with particularly difficult comparisons. This quarter's restructuring results reflect a nearly $100 million step down in restructuring revenues relative to last year's record setting performance. Also weighing on this quarter's total results is the fact that our second half strategic advisory revenues will be heavily skewed towards the fourth quarter. After Helen presents our 3 and 9 month financial results, I will review each of our businesses in greater detail.

Thank you, Paul. Good morning. Beginning with revenues. Total revenues for the quarter were $231 million, down 22% year-over-year. Advisory revenues were $180 million, down 31% year-over-year. As Paul mentioned, while we experienced continued year-over-year growth in strategic advisory revenues, that growth was masked by the nearly $100 million decline in restructuring revenues from last year's record levels.

Placement revenues were $47 million, up 48% year-over-year, driven by strong activity and fund placements. For the 9 months ended September 30, total revenues were $679 million, down 7% year-over-year. Advisory revenues were $530 million, down 13%. Similar to our third quarter results, growth in strategic advisory revenues was more than offset by a decline in restructuring revenues. Placement revenues were $138 million, up 30% year-over-year, driven by higher fund placement fees.

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.

Adjusted compensation expense continues to be accrued at 62.5%. We review our comp estimate every quarter and 62.5% ratio represents our current best estimate for the compensation ratio for the full year.

Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was $33 million for the third quarter and $93 million for the first 9 months. Increased senior adviser costs, as well as, increased expense relating to investments in IT and recruiting contributed to higher non-comp expense in both the third quarter and the 9 month periods. We also saw an increase in travel expense in the third quarter, but business related travel activity is still tracking well below pre-COVID levels.

Turning to adjusted pretax income. We reported adjusted pretax income of [$54 million] for the third quarter and $161 million for the 9 months. With an adjusted pretax margin of 23.3% for the third quarter and 23.8% for the first 9 months. The provision for taxes. As with prior quarters, we presented our results as if all partnership units had been converted to shares and that all of our income was taxed at a corporate tax rate. We also annualized the tax benefit relating to the delivery of vested shares during the first quarter of this year.

We expect our effective tax rate for the full year to be 23%, which is just slightly above our previous estimate of 22.8%. Our adjusted if-converted earnings were $0.98 per share for the third quarter and $2.93 per share for the first 9 months. For the quarter, our weighted average share count was 42 million shares.

During the third quarter, we've repurchased the equivalent of approximately 584,000 shares through the exchange of partnership units for cash, as well as, through open market repurchases. And our repurchases for the first 9 months total approximately 2.9 million shares, including the exchange of approximately 1.3 million partnership units for cash. We're currently in receipt of exchange notices for an additional 168,000 partnership units. And as we have done in the past, we will exchange these units for cash.

On the balance sheet, we ended the quarter with $334 million in cash, cash equivalents and short-term investments and $229 million in net working capital, and we have no funded debt outstanding.

Since quarter end, we've paid the previously announced special dividend of $3 per share. For this quarter, the board has approved a dividend of $0.05 per share, which is payable on December 22 to Class A common shareholders of record as of December 8.

I'll now turn back to Paul.

Thank you, Helen. Now, let me provide a bit more detail on our businesses and our outlook. Beginning with restructuring. Given the extraordinarily benign credit backdrop, global default rates have returned to pre-COVID levels. And while we do not expect this market dynamic to persist for very long, it is the environment in which we currently operate.

Over the medium to long term, we continue to expect the fallout from COVID-19 to trigger an extended period of elevated restructuring activity. The pandemic has inflicted damage on many companies with business models dislocated by changes in consumer behavior, as well as, accelerated technological innovation. These challenges, combined with the sheer quantum of debt outstanding will, over time, result in significantly increased demand for our restructuring services.

We're already starting to see early signs of stress building in the system, and we are engaging with clients around supply chain disruptions, rising labor costs, rising commodity prices and inflationary expectations that are beginning to build. Our market-leading franchise remains well positioned for when the environment turns as it will, and we continue to invest in the business.

Turning to PJT Park Hill. This year, our PJT Park Hill business is delivering record performance and is benefiting from strong secular growth trends taking place in the alternative asset investment market. On a macro basis, managers are deploying capital at unprecedented rates. And as a consequence, many are raising follow-on funds more quickly and in larger size. In this environment, our focus on best-in-class managers with differentiated fund strategies is a significant competitive advantage.

As our market-leading PJT Park Hill franchise becomes even more aligned with our strategic advisory business, we are increasingly positioned to take advantage of expanded opportunities with financial sponsors and other asset managers. Our business momentum is strong, and looking ahead, we see additional opportunities to gain share.

Turning to strategic advisory. In strategic advisory, following a very strong 2020, where our growth rates were well ahead of market benchmarks. We entered 2021 with a record number of mandates, but with fewer transactions that had been announced and were awaiting closing. Since then, we have seen a steady increase in our mandate count, up nearly 30% through the 9 months and the pace of announced transactions measured by dollar value and number is tracking well ahead of last year's levels. We expect our momentum in strategic advisory to translate into significantly greater strategic advisory revenues in the fourth quarter and set us up well for next year.

PJT CamberView is also tracking to deliver record performance in 2021 and will enter 2022 with a record backlog. Overall, PJT CamberView is benefiting from its strong positioning in strategic IR, ESG and shareholder activism.

Looking ahead, we are poised to enter 2022 with a demonstrably stronger and more powerful firm than we began 2021, and we remain extremely confident in our future growth prospects.

With that, we will now take your questions.

(Operator Instructions). Our first question today comes from Devin Ryan of JMP Securities.

I want to start with a question on the outlook for strategic advisory. And looking at the presentation a quarter of the strategic advisory partners still have not been on the platform for 2 years. So there's still, I think, some maturing on PJT's platform. Can you maybe talk a little bit about the production of that cohort relative to the other 75% that have been on the platform for more than 2 years? And just how production tends to ramp here? Because it would seem that we're heading into 2022 with some productivity gains on kind of the younger cohort. But if there's any other context you can give us would be helpful.

I mean, I think all of our partners are showing increased productivity because it's not just whether you've been here for less than 2 years or more than 2 years, it's clear that our partners are taking a long-term view. They're investing in places where there's a long-term opportunity to not only build a differentiated relationship but to generate outsized economic opportunities for our firm. And that means not to chase necessarily what's right in front of you, but to aim high in the steering wheel and to look down the road and to make sure that you're building the long-term trusted relationships. And if you do that, inevitably, your business ramps with a long-term perspective, that would be the first point. And I think that's true of partners who are on for less than 2 years and partners who are on for more than 2 years.

The second thing is, in some of these verticals, as we have begun to enter these verticals every incremental partner that is added brings a disproportionate productivity gain to the overall franchise, because sometimes it's the third partner in a sector where it all comes together. And it's not that the third partner was the most productive. It's that you needed to get to an efficient scale to do this. And then what's also clear is everywhere we compete. We're better known, there's more experience, there's more connectivity, more prior experience with board members, executives and the like.

So I think we're very much in the early innings of getting the full productivity ramp from all of our partners. And the reason why, just to remind everyone, we always talked about pre imposed 2 years. Is, unless you are incredibly fortunate that the revenue, given just the lead times to get a mandate and for mandates to lead to announcements and announcements to turn to closings there's just a time lag where we don't expect much, if any, revenue in the first 2 years. That doesn't mean that we magically have a fully mature partner when they're 2 years and 1 month. And I see tremendous productivity gains across the field. So that's how we think about it, Devin.

Just a follow-up here on capital return, and, I guess, the outlook there. Obviously, now that you've paid out the $3 special. And as we think about kind of the next chapter, if you will, for PJT, clearly, the firms generating substantially more excess capital beyond paying the dividend. So how are you guys thinking about priorities at the moment? And are there any areas that feel more attractive? And should we be thinking about maybe more special dividends or greater buybacks? Or how should we be thinking about kind of capital return priorities?

Well, we're still big believers in our franchise and in the value proposition. So you should expect us to continue to be aggressive repurchases of share and share equivalents. One of the reasons why all of that aggressive share repurchase hasn't translated into reduced share count is because over the last 6 years, a lot of the earn-outs have been triggered. And on a going-forward basis, you won't have that to the same extent.

So we're actually going to most likely end up with reduced share count, not just maintaining share count. I think that's probably going to be our focus. We do, at some point, need to figure out as a companion, whether we want to increase the dividend on an ordinary basis or as periodic specials. And I think it's probably a bit early to make that decision. But at some point, we'll probably have a fork in the road and we'll head one place or the other. And I think we'll be informed by some of the conversations, we begun to have in engaging with our own shareowners. But I would not want to suggest that our principal capital return is going to deviate from the investment that we feel most confident which is repurchasing our own shares.

Our next question comes from Richard Ramsden of Goldman Sachs.

So perhaps I can just start off with a bigger picture question, which is, look, Paul, since you last spoke, inflation expectations have picked up a lot. The market's expectations for interest rates have also moved up a lot, both at the short and the long end of the curve. As you think through both the positives and negatives of higher rates, could you just talk about how you think it impacts each of your constituent businesses as we head into 2022?

Well, I think there's no doubt that rising interest rates should create a more hospitable environment for restructuring, right? You've had incredibly receptive capital markets. Everyone is chasing yield because you're chasing yield, you're prepared to go further out on the risk continuum. And that's not sustainable in the long term. And I do believe that there are a lot of companies whose business models have been severely impacted by what has transpired over the last 2 years who have been able to kick the can down the road because of extraordinarily benign credit conditions.

And that, in turn -- herewith rates so low, has driven any risk on trade into equity markets and with capital so plentiful that has probably pushed out even more than we had anticipated, the inevitable day of reckoning in restructuring. So I would suspect that over time, there needs to be a tipping point, but over time, you'll find a lot of companies who will not be able to refinance -- won't be able to refinance on attractive terms.

And I think there's that issue. I think there's also the issue of the trigger typically in restructuring is just a significant pivot. And that's either because you're dealing with foreign exchange exposure and the exchange rates move against you or because you're positioned one way with interest rates and rates move away from you? Or you're positioned one way in terms of inflationary expectation and prices either fall in an unexpected way or they rise. It's really -- if everything happens according to plan, then most companies are able to manage their plans. So you need shocks to the system to create real restructuring activity, and I suspect that some of those conditions are beginning to build.

Now the question and -- some of our other businesses is, I think they're reasonably immune from movements there. Clearly, in Park Hill, probably the mix of product, which managers, which strategies you bring to market will change over time? As the macro environment changes, but I don't think it really affects the strength or the momentum that we have in the Park Hill business, but it probably means that we will continue to pivot as to where there's the greatest investor demand and which asset managers and which strategies we bring to market. I think, clearly, as the world becomes far more complex, and stories are more difficult to convey to investors with ESG becoming increasingly at the forefront with the need to be able to engage with shareowners. I think as the world becomes a bit less predictable, then that probably benefits our CamberView business.

And on the strategic advisory side, I think within some degrees of freedom, I don't see it meaningfully changing the basic thrust of higher M&A activity. But clearly, like everything there comes a tipping point where you end up with some real headwinds. So I don't know if we're anywhere near that, but at some point, if there's enough disruption in the marketplace, I suspect that will have a dampening effect on strategic advisory. But the one point to make here is until we're meaningfully bigger as a strategic advisory franchise, our growth is going to be pretty much idiosyncratic and reasonably uncorrelated to the overall market.

Our growth is really from a micro basis. And that's why we've been able to grow every year, and that's why we've been able to grow significantly. And that's why in years like 2020, we've been able to grow at extraordinary levels when others haven't grown at all. And that's why we're not as tied to the macro environment. So that's probably the one business where the macro environment is of a lesser concern because we really are disconnected from the broader market. Now, at some point, as we continue to grow at these very hefty rates. Our strategic advisory business on the M&A side will double essentially from 2019 to 2021, if you keep doubling that business, we will get to a point at some point that we are representative of the broader market and will then become more concerned about some of the macro trends. But right now, we're very much a micro story.

And then perhaps, can I just ask a follow-up on restructuring? And I know that you said that your anticipation is that, that business is going to run at closer to the 2019 level. But if you look at where you are in Q3 and perhaps your expectations for the second half of this year, are we materially below the 2019 run rate? And is it your expectation that it's going to stay there at least in the near term?

I'm load to say it can't go any lower, but I think we're reasonably confident. In fact, we're highly confident that we'll end the year pretty much on top of 2019 levels. And from there, I view us having essentially de-risked the business. Now, that doesn't mean it could go a little bit lower. But if we were to get any headwinds in that business, it would be a fraction of the wins that have been blowing in our face in 2021. So whether it's the absolute bottom, whether it could go a little bit lower, that's much less of a concern, but the quantum of any potential further leg down and restructuring is a fraction of what we've experienced this year.

(Operator Instructions). Our next question today comes from Steven Chubak of Wolfe Research.

So Paul, I just wanted to unpack some of the commentary that you just conveyed around like the 30% increase in mandates on the M&A side, coupled with the fact that the restructuring business has been largely derisked. I was hoping you could frame what the growth expectation is in '22 versus '21, your confidence that the revenue growth should be materially better, recognizing that 2020 was a year of particular strength for you guys, 2021, maybe representing a little bit more of a transition year as we start to lap some of these tougher restructuring comps?

I think the best way to say it is, if you look at our -- whatever our consolidated rate of growth is this year, if you were to unpack it relative to, call it, our 4 businesses, I think it's representative of none of the 4 businesses. It's literally the weighted average of the 4 businesses, with 3 of them growing at healthy rates and one of them with very significant headwinds. And when you put it all together, you're going to get some weighted average of that, and that's the business mix. But what you don't see in the consolidated numbers is significant momentum in our strategic advisory business, ex-PJT CamberView, our momentum in PJT CamberView and our momentum in the PJT Park Hill business. So therefore, the consolidated number is really just a roll-up of 4 businesses, 3 that are growing at healthy rates and one that had very significant declines, and we've already talked about the fact that it was stepped down nearly $100 million just in the third quarter alone. If you go forward to 2022, we see the momentum in those 3 businesses continuing into 2022 and presumably beyond. But let's just talk about 2022 for now.

And while I don't know exactly what happens in restructuring next year, we're going to move from, most likely a very severe headwind to pretty much of a neutral set of conditions there. So then that weighted average is going to look very different than whatever it looks like for 2021. And I don't want to lose sight of the fact that we have a leading restructuring practice. But because it is and was so successful in acquiring all of these mandates and earlier than others and in a very large economic pool that they were able to capture, we had extraordinary success, and we're just dealing with riding down the macro.

But inevitably, this market is going to turn. And when it does, we're going to be even more powerful because every day that we build out the strategic advisory footprint that just means that we have another helping hand to help the restructuring folks run the table when the market turns. So even though quite neutral about the 2022 restructuring environment. I don't view the ‘22 restructuring environment of the ‘21 restructuring environment. As what we're likely to see over the next number of years because it's inevitable that there's going to be a pickup, and we're going to be extraordinarily well positioned to capture that.

And maybe just for my follow-up, I'll just call this a tough but fair question. I think one of the concerns that we've been hearing from folks is that you posted the best results of any firm that we track in 2020. 2021, it's been a little bit more tepid. And the expectation is that some of the tailwinds that we've seen in '21, whether it's European M&A, sponsor activity, there are other competitors that are more indexed to some of those areas. And you guys are stronger, whether it be restructuring or large-cap M&A, where activity is supposed to remain a little bit more tepid or lukewarm. And I was hoping you could just speak to where those concerns might be misguided from your point of view and just how you believe you're positioned relative to peers competitively heading into next year and beyond?

Well, I think about it very much on a micro basis, not on a macro basis. The way we -- right now, if you think about our firm, as much growth as we have generated in terms of headcount, revenues, market presence, we view ourselves as still in the early innings. So just to give you a perspective, our headcount in a strategic advisory has quietly when no one's looking growing 20% in the first 9 months of the year, okay? We are continuing to grow at a significant clip. We do not report our strategic advisory M&A revenues separately.

But just to dimensionalize it, if you look at the 2 years of the pandemic lockdown of '20 and '21 as a [peer] trade, we came pretty close to or will double our strategic advisory revenues, which I put up against anyone anywhere. But the way we're doing that is we're not the market. We're not yet in every industry vertical, we're not in every geography. We're not anywhere near fully built out. So our growth is going to be idiosyncratic. It's a function of the people on the platform, their client focus and winning clients one at a time.

And as a result, I don't really spend a lot of time thinking about the market. We don't sit down at the beginning of the year and say, what's the market going to do? And what is our share of that going to be? We literally sit down, banker-by-banker, client-by-client, and we continue to build relationships. And if we focus on the revenue we're going to generate this year, then we're not being relationship-oriented bankers. So we focus on the clients, on becoming a trusted adviser on securing a mandate.

And then ultimately, if you put enough of those planes up in the air, a lot of good things are going to happen. And that's one of the reasons why we spent so much time looking at mandate count because that's how many clients have selected us as their trusted adviser and how many mandates do we have because inevitably, the more that we have of that. And I'm not sure that we really need to focus on what others are doing.

So I don't really spend a lot of time on that. What I do know is, we're just getting started. We have very significant growth this year that is being masked by what is a very significant restructuring headwind and when that headwind stops blowing, I think some of the earnings power of these other businesses will return to being more evident. And as you track our 6-year history, we have made continuous progress in building out the franchise, how that has hit the bottom line has been anything but continuous. So that's who we are.

And just one final one from me. You acknowledge that the restructuring environment remains quite tepid. The one area or region, I should say, where activity is picking up meaningfully is China. Just wanted to understand in terms of your global footprint, how you're positioned, at least to participate in some of those revenue opportunities are starting to manifest?

Right. We do not talk about client mandates that we have, but we are very focused on the region. We have footprint there. We have very senior connectivity. We have a restructuring team that has done a lot in the Asia region, and you should assume that we're quite mindful of the opportunities.

As there are no further questions, I'd like to hand the call over to Paul Taubman for closing remarks.

I think this concludes our third quarter earnings review. We appreciate all of your interest, and we look forward to speaking to you when we report full year results in early 2022. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.