PJT Partners Inc (PJT) 2023 Q1 法說會逐字稿

Good day, and welcome to the PJT Partners First Quarter 2023 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, ma'am.

Thank you very much. Good morning, and welcome to the PJT Partners First Quarter 2023 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' 2023 Form 10-K, which is available on our website at pjtpartners.com. 

I want to remind you that the company assumes no duty to update any forward-looking statements and that the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For detailed disclosures on these non-GAAP metrics and their GAAP reconciliations, you should refer to the financial data contained within the press release we issued this morning, also available on our website. And with that, I'll turn the call over to Paul.

Thank you, Sharon. Good morning, and thank you all for joining our first quarter report. The current market environment can best be described as treacherous as the unprecedented magnitude of Fed rate hikes continues to take their toll. This historic monetary tightening campaign has caught numerous financial institutions wrong-footed, creating deposit funding vulnerabilities and causing significant financial institutions to come undone. The deposit migrations resulting from these bank failures, coupled with rising funding costs, will inevitably trigger a more restrictive credit environment, slow economic growth and increase the odds of a recession. 

It is not surprising that worldwide M&A activity has fallen to levels not seen in nearly 15 years, given that credit conditions have not been this challenging in nearly 15 years. In this difficult market environment, our firm performed well on a relative basis, with revenues in strategic advisory and restructuring combined down only 5%. Firm-wide revenues, which also include the PJT Park Hill business and reflect a nearly $40 million step down in PJT Park Hill revenues, declined 19% year-on-year. 

Since our firm's beginnings, our investment priorities have always been about attracting and developing best-in-class talent at all levels. Notwithstanding today's subdued M&A activity, our commitment to that investment strategy and our confidence in the returns from that investment have not waned. In this stressed environment, we are seeing an unprecedented number of extraordinarily talented people who want to explore a career at PJT. We fully expect that 2023 will be a record recruiting year for our firm. After Helen takes you through our financial results, I will review our business performance, strategic priorities and outlook in greater detail. Helen?

Thank you, Paul. Good morning. Beginning with revenues. The total revenues for the quarter were $200 million, down 19% year-over-year, driven by meaningfully lower revenues in PJT Park Hill. Strategic Advisory revenues were modestly lower year-over-year while restructuring revenues were comparable to year-ago levels. 

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 was 66.5% of revenues for the first quarter compared to our full-year ratio in 2022 of 64.1%. Unlike prior years, the first quarter accrual does not reflect our best estimate for the full year. The higher first-quarter compensation expense simply reflects increased fixed compensation expenses against lower revenues compared to year-ago levels. Given the continued uncertainty in the marketplace, coupled with our unprecedented levels of senior recruiting dialogues, we will provide our best estimate of the full-year compensation ratio when we release our second-quarter results. While the factors which affect the ratio of fluid, the full-year compensation accrual rate will likely be materially higher than last year's 64.1%. 

Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was $36.5 million in the first quarter, up slightly from $35 million in the first quarter last year. The higher expense was primarily driven by increased business travel and entertainment expense. Despite the modest year-over-year increase in the first quarter, we expect our full-year non-compensation expense in 2023 to grow in aggregate in the low double-digit range from last year. That growth will be principally driven by higher costs related to travel and entertainment as well as higher professional fees. 

Turning to adjusted pretax income. Our adjusted pretax income was $30 million in the first quarter compared with $56 million in the same period last year. And our adjusted pretax margin was 15.2% for the first quarter compared with 22.8% for the same period a year ago. 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. Our effective tax rate was 26% for the first quarter, in line with our full-year 2022 rate. The tax benefit relating to the delivery of vested shares during the first quarter at a price higher than their amortized cost was similar to last year's benefit. We take a full-year view of that benefit, and we currently expect our full-year effective tax rate to be around 26%. 

Earnings per share. Our adjusted converted earnings were $0.54 per share for the first quarter compared with $1 per share in the first quarter last year. On the share count for the quarter, our weighted average share count was 41.7 million shares, flat versus a year ago. During the first quarter, we repurchased the equivalent of approximately 1.2 million shares, primarily through open market repurchases. In addition, we plan to exchange 139,000 partnership units for cash on May 9, 2023. On the balance sheet, we ended the quarter with $99 million in cash, cash equivalents and short-term investments and $268 million in net working capital, and we had no funded debt outstanding. 

Finally, the Board has approved a dividend of $0.25 per share. The dividend will be paid on June 21, 2023, to Class A common shareholders of record as of June 7. And with that, I'll turn back to Paul.

Thank you, Helen. Let me review the businesses, beginning with PJT Park Hill. As we telegraphed on our last earnings call, PJT Park Hill revenues declined nearly $40 million from year-ago levels, given limited fund closings and difficult comparisons. The fundraising environment for alternative investments continues to be challenging. Despite the recent recovery in public market valuations, the denominator effect still weighs on alternative asset allocations. 

This over-allocation has been magnified by the sharp reduction in capital returns to LPs, given the relative dearth of monetizations via M&A, IPOs and leverage recapitalizations. As a result, we are seeing smaller fundraises and longer marketing periods. PJT Park Hill, with its best-in-class distribution capabilities, remains the go-to firm in fundraising. In this challenged fundraising environment, PJT Park Hill should be able to make up some of the first quarter deficit, but not all, keeping PJT Park Hill's 2023 revenues below last year's record revenue levels, even with continued progress in our secondary or private capital solutions business. 

In restructuring, our first quarter restructuring revenues were comparable to last year's first quarter levels. We are benefiting from higher levels of restructuring activity, which we expect will remain elevated for some time. A difficult economic backdrop has pressured corporate fundamentals across the board. Not surprisingly, companies with levered balance sheets are finding higher financing costs and a more restrictive credit environment, particularly challenging. This stress is being felt more broadly across industries and regions and default rates continue to move higher. Consistent with last quarter's commentary, restructuring revenues are expected to grow significantly for the remainder of 2023. 

Turning to Strategic Advisory. While the broader M&A environment continues to be quite difficult, revenues for our Strategic Advisory business were down only modestly in the quarter relative to year-ago levels. The decline was significantly less than the decline in industry-wide completed volumes. We are certainly not immune to a more challenged M&A backdrop characterized by more restrictive capital access, higher financing costs and more aggressive antitrust enforcement. Our progress, however, remains less tethered to the overall M&A environment, and much of that progress is driven by the success of our recruiting efforts, the maturation of our teams and the growing recognition of our brand.

Our mandate count, while down approximately 10% from year-ago levels, has grown appreciably since the start of the year, with a discernible uptick in April. While we are confident in our progress client by client, given the fragile nature of the broader M&A market, we remain cautious on the performance of our Strategic Advisory business in 2023. Nevertheless, we are positioned to outperform on a relative basis given the investments we have made in this business. Longer term, we remain confident in our strategic advisory growth prospects as we continue to leverage and integrate our enhanced capabilities, expand our client footprint and benefit from greater brand recognition. 

With respect to talent, given the current focus in the marketplace on recruitment, I'd like to reiterate our philosophy regarding investments in human capital. Over the past 8 years, we have not wavered. We have consistently been focused on investing in and attracting the right talent at all levels, integrating this talent into our firm and infusing it with a culture of collaboration, maintaining discipline in our compensation practices, rewarding the right types of behavior and performance and remaining focused on the long term. This philosophy has been key to our success. By staying true to this philosophy, we do right by our clients, we do right by our shareholders, and we do right by our employees. With respect to the cadence of our hiring, many of the impediments we have previously spoken of are no longer obstacles. 

The current environment has presented us with an extraordinary opportunity to aggressively accelerate the pace of senior hiring while remaining true to our core principles. The elevated level of hiring dialogues this year brings with it uncertainty regarding the precise magnitude of our hiring. And notwithstanding the progress we are seeing in our client dialogues, the challenges in the broader M&A marketplace bring with it heightened uncertainty regarding our ability to translate that progress into 2023 financial results. Taken together, we expect to report an elevated compensation ratio this year.

As Helen has indicated, we will provide our best estimate for our full-year compensation-to-revenue ratio when we communicate second-quarter results. By then, we will have a much better sense as to the magnitude of those elements. As we look ahead, we expect to navigate 2023 better than the macro backdrop would suggest. We expect any declines in our strategic advisory revenues to be more modest than declines in overall M&A activity and that these declines will be more than offset by increases in our restructuring business. While these are difficult and challenging times, our firm is built to weather difficult and challenging times. We will continue to invest to strengthen our firm, and we remain very confident in our prospects. And with that, we will now take your questions.

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

I'll start with a 2-part question here. So the first part is, let me just get a little bit of a finer point on the unprecedented recruiting environment. I appreciate it's hard to predict what this year will look like. But just anything you can give us. How many more serious conversations you're having, and just kind of the size and scale of kind of those types of conversations? And then the second part of that is just the comp ratio interplay. So the 66.5% comp ratio, appreciate that we're going to get maybe more of a full-year update in the second quarter. But how much in that 66.5% is contemplating this much stronger kind of recruiting backdrop where potentially you could lean in and take a bit.

Okay. Let me come at this. We've consistently spoken about the challenges of the last few years in recruiting. We've talked about COVID, COVID lockdowns, trying to recruit in a virtual world. We've talked about the fact that when the COVID fog lifted, there was unprecedented activity levels. And when you have unprecedented activity levels, the switching costs and ability to engage in dialogues is meaningfully compromised. And we've talked about the fact that we have very precise criteria for what is best-in-class talent and how that talent fits into our organization and that we were not going to be, in any way, slaves to recruiting targets. And as a result, relative to the long-term trend, while we were very consistent in the growth of the overall headcount, we probably added less senior partners than we would have in more normal times. 

Now in this environment, the world is very different, and it's a world that we're going to benefit from. I would just say, as an example, we probably sit at the end of April with the same number of hires as we had for all of last year at the senior level. So that would give you some appreciation that 4 months into this year, we've essentially matched our hiring for last year. And the number of dialogues and the quality of individual and the dialogues that we're having is going to absolutely turn this into a record recruiting year for us at the senior levels.

Okay. And I guess maybe just the comp ratio interplay as well and how that will be affected by this higher recruiting and what that 66.5% is maybe already implying about the outlook there?

Well, I think the 66 (sic) [66.5%], as Helen said, it really just stands on its own for the first quarter, and it's reflective of the low revenues in the first quarter relative to the full year, higher fixed costs in the first quarter. And then in the second quarter, we will return with our best estimate as to full-year compensation-to-revenue ratio. But I think just to address the point, the reality is we made significant investments in talent at all levels. We've grown our headcount considerably. We are seeing very meaningful progress, and the acceleration in the quality of our client dialogues, the mandates received, the strength and the health of the business gets us to be incredibly optimistic about where we're headed. 

So we're at this difficult inflection point where we've added a lot of headcounts. We're looking at this as an opportunity to increase the hiring principally at the senior levels this year. I think this year is probably the composition is going to change, where perhaps we may add less aggregate individuals, but it will be far more senior weighted than in the past. And in an environment where we're making significant investments, where we're seeing tangible progress and where the firm is clearly strengthening itself for the intermediate to long term and in an environment where there's a lot of uncertainty as to how much of that progress will be reflected in our 2023 financial results, it's inevitably going to pressure the comp ratio.

And then the follow-up is on the outlook commentary. So I appreciate a lot of the detail you gave. And I believe I heard correctly that the potential slowdown in M&A should be more than offset by restructuring activity this year. And so I guess, I'm just trying to square or even quantify more on the restructuring acceleration and kind of what you're seeing there or anything you can give us on order of magnitude or a number of mandates similar to how you provided detail on the M&A business? And then also what that maybe looks like I know the revenues have a pretty healthy lag generally on them relative to announcements. And so what that acceleration looks like into 2024 as well.

I mean, we got to sort of get 2023 done and dusted. What I would say is I think we, perhaps earlier than others, saw a significant pickup in restructuring activity. And we've been communicating for some period of time that we see the credit markets becoming increasingly distressed. There's increasing awareness of the wall of maturities, which are starting to creep up, and there's a very significant quantum of debt that needs to be addressed over the next 3 years. We're seeing a lot more proactive management of liabilities and capital management exercises. 

We're starting to see companies need to address their liability stack through Chapter 11 proceedings. We're seeing it kind of across the board, and it's broad-based and the activity levels that we're seeing are meaningfully accelerated relative to where they were a year ago. There's no doubt about that, and it's broad-based. It's broad-based by industry, it's broad-based by type of assignment. It's broad-based by geography, and I think, as we've said previously, that increase in activity will begin to flow through the income statement starting in the second quarter. And while the first quarter revenue contribution was comparable to a year ago, I think starting in the second quarter, you'll see a significant increase in restructuring revenues. And I expect that that will continue for an extended period of time, but I'm not necessarily prepared to tell you for how long and the exact quantum, but I think there's no doubt that we're in a different phase of the restructuring cycle. 

And all we're really experiencing are default rates beginning to approach long-term trend lines. We're not dealing with sort of lockdowns and COVID hysteria and the like. We're dealing with just the ever more normalized credit conditions relative to aggregate interest rates, default rates and the like. And if we get to high-stress environments, then those restructuring levels that have moved up meaningfully could step function up again, but I don't think we're there yet, and we may never get there, but we're certainly going to get to a level of activity that is far greater than what we experienced in '21 and '22.

Our next question comes from Steven Chubak with Wolfe Research.

I want to start off, Paul, with just a question on PJT Park Hill. Fundraising, as you noted, remains challenged. Part of the difficulty here is you cited the overallocation issue, which has been magnified in this environment. I'm trying to understand whether this is a secular issue for the business as it's not really clear to us how this overallocation overhang ultimately gets resolved.

I think it gets resolved in 1 of 3 ways, right? I mean, ultimately, it gets resolved. One is public market value snapback, and then all of a sudden, you don't have the denominator effect to the same extent. The second is if private equity meaningfully reduces the capital that they're deploying, then you get back into balance that way as painful as it may be to the M&A market, we're experiencing some of that today. And then some of that gets addressed when the capital markets get back to equilibrium, and the IPO markets open up when leverage recapitalizations begin to be actionable again and when more of these portfolio companies are offered up for sale, and you create monetization events. 

So we're just sort of at a dislocation. I mean, the beauty of the business is, while there may be an inflection point, it doesn't need to last terribly long before you get everything back into equilibrium, and we're just sort of in that air pocket until it gets back into equilibrium. But a lot of what's going on today, which is meaningfully reduced investment by private equity is indirectly getting to some of this. And as the public markets begin to recover and grind higher, that's dealing with some of those, too.

Helpful color, Paul. Just one follow-up for me on the comp ratio. You cited some of the pressures relating to recruitment or elevated levels of recruitment in this environment, why did it take advantage? As we think about a backdrop where we start to see an inflection in M&A activity next year, some continued healthy levels of activity on the restructuring side. Is it reasonable to expect that full-year comp ratio in 2024 could get more in line with historical levels?

Look, I think what I said -- I'd go back to what I said 3 months ago, which is if you ask me to look out 2 to 3 to 4 years, my crystal ball gets a lot clearer, and I see the operating leverage and the returns on the investment we're making. But if you're asking me to look at the here and now where we're potentially stepping up the recruitment levels and where we're seeing a lot of progress in the building out of the firm, and we're hiring the right people, and we're getting the right results, and we're strengthening the firm. But in this current environment, we don't have the revenues that correspond with the investment in the near term. It gets turbulent in the near term. But as we get past it, it looks normalized and the like. So everything I said 3 months ago, I think, remains true today. 

Probably what's a little different as we get into the year is the recruiting opportunities are greater than what we had expected at the beginning of the year. I think the progress we're seeing in the build-out of our firm is greater than what we had expected or hoped for. And I think the third is, while we've always known this would be a challenging marketplace from M&A activity perspectives and volumes and the like, I think probably it's clear that -- well, that's not probably it is clear that the transmission from the progress with clients to revenue recognition is going to be delayed. So as soon as we get past this bit of a hump, I think we'll get back to normal levels.

Our next question comes from Jim Mitchell with Seaport Global.

Paul, maybe just on the M&A environment and outlook. We've heard from some of the large -- our larger peers and smaller peers just sort of the dialogue levels remain elevated, people sort of getting their plans together, particularly on the strategic side for when environments do get better. Are you seeing that? Are you seeing dialogue levels hang in there? And do you feel like once things clear up on the macro side that things could bounce back? Or how are you sensing the M&A environment?

Look, it's difficult for me to answer that question because we don't touch everyone, right? We don't -- we still have a smaller footprint and a lot of our progress is a function of microelements, which is who we've added to the platform, how long they've been on the platform, and colleagues they have to work with, ever-increasing comfort and excitement about the firm, more brand awareness, all of that. I think it's clear that we're seeing a lot more activity in Europe. I think we're seeing a lot of activity in the $1 billion to $5 billion transaction size. I think we're starting to see private equity return and take advantage of some of these dislocated prices. I think we're seeing strategics think about big things because some of their grander aspirations have been put on hold, and at some point, they need to get on with reconfiguring or repositioning their firm. 

But trying to translate all of that into sort of a sustained recovery and when it hits and exactly where it hits is difficult. I suspect that overall M&A volumes will remain muted for a while longer. But one thing which is different about the second half of this year versus the second half of last year is while you had depressed volumes in the second half of last year, the second half of last year was a dramatic deceleration and a deterioration in business conditions and market prices relative to the first half. That's not the case here. And I think sometimes it's the rate of change that's the most jarring. So I think this is sort of how you begin to build the base and grow from here.

No, that's helpful color. And just maybe on how to think about our size, the restructuring contribution with the M&A contribution strategic advisory contribution down. Are we at a point where the restructuring business is bigger than strategic advisory at this point? Just for us to think about the drivers of your total revenue, if there's any way to size that contribution would be helpful.

I think we need to see where the full year turns out because it's not clear at this point in time the magnitude of either the up in restructuring or the down in strategic advisory will be. But maybe later in the year, we could address that. But what I am confident of is, as a pair trade or taken in aggregate, that those 2 businesses together will generate incremental revenues this year relative to how those 2 businesses performed last year.

Our next question comes from Matt Moon with KBW.

Very clear from your prepared remarks on the continued evidence of some recruiting, particularly on the senior side. Just curious if you could just expand upon what verticals of the business you're seeing the best opportunities in, as well as if there are any specific geographies, can you see relative strength in these opportunities? That would be great to hear.

Look, I think we're always trying to start with the individual because recruiting in an A+ space in terms of activity and wallet. But if you don't get the right individual or individuals, then that's not the way to build the business for the longer term. So a lot of this is a function of trying to find individuals who have differentiated talent and work well in this organization. Clearly, if we already have the space covered, then we're not going to just add duplicative resources. But if there's an opportunity to go from strength to strength, we're going to take strength, and we're going to enhance it if we can add additional resources that make us that much more powerful. But we clearly have an eye on expanding our successes in health care and to go deeper. We want to expand our presence in technology. 

We want to expand our build-out in Europe. We want to expand our efforts in consumer retail. There are other -- that's the beauty of this firm is there's an awful lot of white space, and there's an awful lot of opportunity. And then there are other spaces where we have leading franchises that are mostly built out, but the reality is we can take it to get another level by going from strength to strength. So it's quite broad-based in terms of geography and industry. And sometimes, when you're adding individuals 1 or 2 to a space, the near to intermediate-term return is not very much. And it's only when you add a third or fourth resource that you sort of light up the network. 

So that's why sometimes the delivery system between investment and revenue recognition can take longer. It's a function of whether you're buttressing strengths or whether you're investing in true white space. But we're taking advantage of it across the board. But we're being incredibly disciplined about making sure we have the right people with the right talent and the right cultural fit. And when we see that, and we're seeing a lot more of that today, we're taking advantage of it.

And then just more of a clean-up question for me on the non-comp expense side. I believe you stated that this would be up double-digit percentage points versus the 2022 levels in 2023. I believe you had talked about that being in the mid-to-high single digits last quarter, and this compares to kind of the 4% rate we saw in the first quarter of this year. So just kind of curious on that divergence between both and kind of what areas we should be thinking about in terms of driving this change in expectations.

Yes. We've stopped trying to break out travel and look at -- everything except travel and growth and just talk about the full expenses. So that low double-digit, as I mentioned, is really driven by an increase in business travel and business entertainment and professional fees. So that's our best estimate right now, and we will continue to update that for you.

Our next question is a follow-up from Steven Chubak.

My apologies, I intended to exit the queue. Matt just asked my question.

Thank you. That was our final question. We will now turn the call back to Paul Taubman for his closing remarks.

Well, I thank everyone for being with us and for your support, and we look forward to speaking again when we report our second-quarter results this summer. Thank you all very much.