Perella Weinberg Partners (PWP) 2022 Q1 法說會逐字稿

Welcome to the Perella Weinberg Partners first-quarter 2022 earnings conference call. (Operator Instructions) This conference call is being recorded. At this time, I would like to turn the conference over to Taylor Reinhardt, Head of Investor Relations. Please go ahead.

Thank you, operator, and welcome to our first-quarter 2022 earnings call. Joining me today are Peter Weinberg, Chief Executive Officer; and Gary Barancik, Chief Financial Officer. A replay of this call will be available through the Investors page of the company's website approximately two hours following the conclusion of this live broadcast through May 19, 2022.

For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 5, 2022, and have not been updated subsequent to the initial earnings call.

Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP's expectations of future financial and business performance and conditions and industry outlook. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those discussed in the forward-looking statements and are not guarantees of future events or performance.

Please refer to PWP's most recent SEC filings for a discussion of certain of these risks and uncertainties. The forward-looking statements are based on our current beliefs and expectations, and the firm undertakes no obligation to update any forward-looking statements.

During the call, there will also be a discussion of some metrics which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8-K, which can be found on the company's website. I will now turn the call over to Peter Weinberg to discuss our results.

Thank you, Taylor. Good morning, and thank you all for joining us for our first-quarter 2022 earnings call. Gary and I are going to provide brief prepared remarks, and then we will open the line for questions.

Our first-quarter results of $152 million in revenues represented our second highest first-quarter revenues and, while modestly below our record level achieved a year earlier, far exceeded every other first quarter in the firm's history. Our level of client dialogue and client touch points are higher today than ever before as we continue to execute against our growth plan.

Our results were supported by activity across our platform with notable contribution from our European business, which turned in another record revenue quarter, significantly exceeding the prior year period notwithstanding strong 2021 performance. We have invested heavily in European talent over the past few years. And we are seeing good return on those investments.

From a sector and product standpoint, we saw strength in our industrials, energy, and healthcare groups. In addition, our first-quarter results included an increased contribution from our restructuring and liability management business, including the contribution of a very sizable fee event in the quarter. Balance sheet impacts from rising rates, and macroeconomic headwinds are spurring a moderate pickup in demand for these services. But barring further deterioration in the market, we do not expect a material rise in traditional restructuring activity for the balance of 2022.

We are now seeing an environment going forward where two forces are pulling at one another. The factors that drove the high level of activity in 2021 are still very much in place. And the need for high-quality independent advice is, if anything, elevated. That said, we're in a very tough macroeconomic environment, and we do not see that changing anytime soon. And while these dynamics will continue to affect M&A and financing volumes in the short term, an inflection point will come just as it did in March of 2009 and May of 2020.

Market volatility translates into greater volatility to our top line, particularly while we are building scale. We experienced this to the upside with a very strong first and second quarters in 2021. And now, based on what we are currently seeing, we expect revenue for the second quarter to be well below our first-quarter results. Although the current environment makes it more difficult to predict when the current high level of activity will translate into revenue, we expect a stronger second half of the year than the first half, even given the current macroeconomic backdrop.

As I've noted before, our business will experience variability in revenue on a quarter-to-quarter basis, but we manage the business with the long-term objective of sustained investment and growth through cycles. Even in the current environment, we are in active dialogues to add accretive senior talent to continue to grow our coverage footprint.

Year to date, we have promoted or hired four partners to our platform and look forward to another partner joining the firm in June. This new partner will bolster our industrials practice and expand our energy transition effort, a topic relevant to our clients across industries. We will continue to add to our partner ranks and carefully determine positions in industry groups, products, and regions.

Some of our recent growth areas, notably tech and fintech, as well as our private capital markets business, have benefited from the addition of revenue-generating managing directors who represent strong client leadership. While we continue to view productivity per partner as the most relevant indicator of our business performance on a per-head basis, we are encouraged by this trend, are continuing to hire behind it, and we look forward to the impact that these individuals will have on our newer investment areas.

In our 16-year history, we have found times of uncertainty and volatility advantageous to progressing our firm and creating meaningful value. And we look forward to once again capitalizing on opportunities to drive growth. We have a strong balance sheet with no debt, which we will use opportunistically. Our platform is diversified across product offerings, and our restructuring, liability management, and financial advisory businesses provide for countercyclical revenue streams.

The fundamental growth opportunity for our business is unchanged. The benefit of our recent investments has yet to be fully realized, and we are continuing to execute against our strategic initiatives. We remain extremely confident in our future growth prospects. On that note, Gary, I will turn it over to you.

Thank you, Peter, and good morning, everybody. As Peter mentioned, revenues for the first quarter totaled $152 million, down 11% as compared to the prior year period. The year-over-year decline was driven by a reduction in mergers and acquisition activity in our US business relative to record 2021 results, partially offset by an increase in non-US mergers and acquisitions completions.

Our first quarter saw fewer advisory transaction completions despite a moderate increase in average fee size per client as compared to the same period in 2021. Our first-quarter results did not include any transaction fee revenue from closings in the second quarter of 2022 in line with both the prior year period and the prior quarter period. While we did experience a significant fee event within the first two days of the second quarter, our revenue recognition policy dictated that that transaction be booked in Q2.

My following comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of the business. Our GAAP measures and a reconciliation of GAAP to adjusted results can be found in our earnings press release, which is on our website.

On the expense side, in the first quarter, we accrued adjusted compensation expense at 64% of revenues within the range of our previously communicated medium-term mid-60s guidance and in line with our expense accrual level in 2021 and our current expectation for the full year. Our commitment to growth through the addition of accretive talent remains a top priority, though it's our responsibility to respond to the market and manage costs and our compensation pool accordingly.

While we continue to aggressively recruit senior talent, we've moderated some of our prior plans to add junior- and mid-level headcount in 2022. Our adjusted non-compensation expense was $32 million for the first quarter, up 31% year over year, though down 9% quarter over quarter and represented 21% of our revenues. In spite of the slight step down in adjusted non-compensation spend quarter over quarter, we continue to expect that our full-year 2022 expense, excluding travel, meals, and entertainment, will be modestly above the run rate recorded in the second half of 2021.

As a reminder, the primary driver of this increased spend for 2022 over the back half of '21 is the anticipated double rent relating to our New York and London headquarters build-outs, which we expect to incur later this year and into next year. We recently entered into two new lease agreements for both locations with New York commencing in April from an accounting perspective and London expected to commence in mid-2022.

Aside from some temporary accounting double rent, we expect that the medium-term run rate gross GAAP lease expense will be meaningfully below our current run rate in New York and approximately flat in London in spite of significantly increased square footage in both locations.

Our 2022 non-comp expense is also expected to include some impact from headcount growth and inflation as well as investment in our people and IT systems, offset by some moderation of certain professional services expenses we incurred last year as a newly public company and do not expect to continue at the same level this year.

We saw T&E moderate a bit quarter over quarter to just north of $2 million as travel in January 2022 was once again impacted by a variant resurgence. As cases receded, our T&E picked up and totaled $1.3 million in March, marking the highest monthly level since the onset of the pandemic, although still about 20% below our 2019 average run rate of $1.6 million per month.

Adjusted net income totaled $21 million for the first quarter. Our adjusted if-converted net income for the first quarter was $17 million and presents our results as if all partnership units had converted to shares of common stock. Adjusted diluted if-converted net income per Class A share was $0.19 for the three months ended March 31, 2022.

The Board of Directors authorized a $100 million Class A common stock repurchase program in mid-February, and the program commenced on March 25, 2022. From that date, and for the four trading days remaining in the first quarter, we repurchased 172,000 shares in the open market for a total cost of $1.6 million. In addition, during the quarter, we net settled 559,000 RSUs and, together with open market repurchases, reduced outstanding shares and share equivalents by 732,000 shares.

Our open market repurchases have continued in the second quarter. And to date, we've bought back in excess of 700,000 incremental shares. At our current valuation, we do share repurchases as a particularly attractive means of returning capital to our shareholders.

As of March 31, 2022, our balance sheet had $223 million of cash and cash equivalents, no debt, and an undrawn revolving credit facility. A portion of this cash has been earmarked for our headquarters expansion projects. We expect our out-of-pocket cost to be in excess of $50 million mitigated in part by free rent periods at both locations.

The Board has declared a Class A common stock dividend of $0.07 per share payable on June 2, 2022, to holders of record as of May 19, 2022. For the quarter, our adjusted as-if-converted tax rate was approximately 30%. This rate will differ from the statutory rate due to several factors, including certain expenses that are non-deductible in nature, the impact of RSU vesting, and the impact of dual inclusion of some income in certain foreign jurisdictions.

Our as-if-converted tax rate is a theoretical figure as it has computed ignoring certain GAAP items excluded in our adjusted reporting, which may have positive or negative tax attributes. In addition, it assumes all partnership units were exchanged for shares of the company's Class A common stock, resulting in all of the company's income being subject to corporate-level tax.

Before we open the line for questions. Let me turn the call back over to Peter.

Thanks very much, Gary. One last thing I will note, as we continue our journey as a newly public company, we welcome the potential additional index inclusion in the coming months, which we view as particularly important, given the increasing flow of assets into index and passive funds and a significant amount of long only buying power, which tracks index ownership. We look forward to expanding our shareholder base and engaging with new investors.

With that, we'll now turn the call back to the operator to open the line for questions. Thank you.

Thank you. (Operator Instructions) Devin Ryan, JMP Securities.

Hey, good morning, Peter and Gary. How are you?

Hey, Devin. Good morning.

Morning. First question -- Peter, you talked about the backdrop, and we've been in similar environments before and waiting for an inflection, which I completely agree with. You also said you're having higher dialogues with clients than ever before, but it's my impression and we've heard from some other calls that it's just taking longer for deals to get to announcement.

And so wanted to maybe just dig in there a little bit and get your perspective. I'm curious if you're seeing that around maybe buyers just looking for some more clarity before they pull the trigger on doing something? Or are sellers unrealistic on prices, given that we've had some repricing at [certain] sectors? Or are there other dynamics that are maybe slowing things down around the readjustment in financing rates and having to either go find new financing or just get people to wrap their head around that. I'm just trying to get more color there.

And then maybe the second part of that is if you can differentiate or distinguish between what you're seeing with corporate clients versus sponsor clients on that front?

Yeah. Okay. So first of all, I think this really all needs to be looked at within the backdrop of our global environment. And as I mentioned, global unrest and macroeconomic concerns are the culprits of a difficult environment here. And we believe that's going to more than offset a lot of the forces that were at work in 2021.

I think to your point, there's a hesitancy, I think, in the boardrooms today, just given those concerns. And I do feel that there will be an elongation between signing and closing as kind of a general matter. Interestingly, our announced and pending backlog is lower now than it was last year at this time, but our pipeline is actually higher, and that's a dynamic that we have generally seen, as you reference, over time in stressed environments.

To your last point, the sponsor ecosystem is a growth ecosystem within our addressable market. And that comes in a lot of different areas. And I actually believe that the sponsor community will be as active as they have been, if not more so, and that the opportunities created by changes in valuation and volatility will more than offset the higher interest rate environment.

Okay, great. And then I guess the follow up -- good to hear about some of the recent recruits and the momentum there and I think just keeping the eye on the ball in terms driving the business for the long term here.

If you could, could you just maybe -- because you guys have so many growth opportunities, I think, across the franchise, could you just stack rank if you think out over the next maybe two years of where the biggest areas of focus are? Just stack rank where you're leaning in most and so we can maybe think about it from the outside if those are the pockets where you could see the most acceleration in either headcount or just early signs of growth momentum.

Yes. So the growth in our firm comes from a bunch of different sources. First of all, in our industry groups, there are growth opportunities in subsectors and at almost every industry group we have. And also, I will add to that that the capital markets advisory group or capital solutions is a growth area for us that's relatively new. And something even newer than that has been our private capital business, which is very important to the firm because it exposes us to growth companies really across our platform.

And so that's where the growth is really is coming from. I think with respect to our -- the partners that you mentioned, we've hired or elevated four partners this year so far: one external, three internal. We're expecting another one soon, and we're having a lot of conversations with partners -- partner candidates from outside the firm right now.

Great. I'll leave it there. Thanks very much.

Thank you.

Richard Ramsden, Goldman Sachs.

Good morning, guys. So Peter, maybe you can expand a little bit on what you're seeing geographically. It sounds like Europe was actually a bright spot for you in the first quarter of the year. Maybe you can talk to the sustainability of European activity. Obviously, a lot has changed over the last few months.

And then, if you could also just touch on what you're seeing in terms of the appetite for larger transactions versus middle-market transactions and how that has evolved since the start of the year?

So in Europe, Richard, I would say that the good news is that the markets in which we operate are governed by stability-oriented leadership. We avoided a close call a few weeks ago in that regard. But I think that's a real positive and something that we don't take for granted. And further, Europe has never been so united, albeit for reasons related to the Ukraine conflict.

Having said that, in addition to the global challenges we all face today, Europe is focused on energy supply and energy security more so than the United States, which can disproportionately affect the industrial economy in Europe, particularly in Germany.

But our business has been resilient in Europe. We have a terrific team there, and we're not going to be immune to these forces. But we -- as I said earlier, the comment that I referenced about our firm as a whole is accurate in the United States and Europe, which is that we've never had more conversations going on and more engagement with our clients.

With respect to your second question on large-cap versus mid-cap clients, I would say that the large -- there's a slowdown a bit in the large transactions as it relates to high-profile transactions, particularly in the technology space in part due to the antitrust situation that we're now facing.

But there were in 2021 over 60,000 merger transactions. And we continue to -- there's still going to be an enormous amount of transaction activity below the large cap, but there will be large cap activity. And I just think it will be in the context of the antitrust environment. We continue to spend time both on large-cap transactions and mid-cap transactions.

And Peter, I might just add one thing to your comment on Europe, which is that, as you know, we've really invested quite heavily in the European franchise over the last few years, not only adding some very senior partners in areas like fintech, digital transformation, and obviously, building up some of our private capital business. There's been a lot of investment there, which we are kind of happy to see coming through.

I will say that the first quarter and very strong performance there, that's obviously representing a lot of transaction activity that really originated last year. So as we think forward to the market, again, we'd be a little careful about extrapolating, but you do have a very active dialogue there. A lot of positive momentum. But again, first-quarter closings, this is true across the firm, generally relate to transactions that got started long before the very recent market turbulence.

That's helpful. And then maybe as a follow-up, can you just expand a little bit on your comments around the second half being stronger than the first half? What type of environment are you assuming? Is it a continuation of what we're seeing today? Are you assuming that things stabilize or deteriorate? I think that would be helpful if you could just contextualize that.

Yeah, and we could both answer that, Richard. The comment that we made earlier is that we do expect a stronger second half. And I would say that applies, and we said this to the current environment. And part of that is related back to my comment on our pipeline, which is very strong, even though our announced and pending backlog is down.

And so we see activity really across the board in mergers and possibly, as we referenced, an increase in restructuring, and also in these two relatively new businesses that we're in, including capital markets advisory and private capital.

And I think, look, the only thing I'd add to that in terms of the back half of the year, again, as Peter said, that comment did assume the current environment. Visibility in the back half of the year, and you've heard this from our peers, is pretty challenging right now, right? It's not as strong as it may have been given the volatility.

So what that means is when we think about our forward gross backlog, which is just all of the dialogues we're having; not just announced deals but unannounced things in the pipeline, there's a lot there. Assessing the [probability] to completion for those is both more challenging, and we assume the completion risk is probably higher in this environment and the time to completion is higher given that mix. So those are the dynamics that we see right now.

Okay. That's helpful. Thanks a lot.

Steven Chubak, Wolfe Research.

Hi, good morning.

Hi, good morning.

I wanted to start off with just a question on some of the market share trends in the quarter. Recognizing one quarter does not a trend make, I was hoping you could just speak to some of the factors that might have contributed to market share loss as implied by the year-on-year decline this quarter, whether there were any idiosyncratic factors in terms of sector, geographic mix, or whether it was simply timing that weighed on revenues year-on-year this quarter?

Yeah, I think, Steve, we feel that our first quarter was a very good quarter. It was our second-best first quarter ever. And it's being compared to our last year first quarter, which was up 84%. And I would just say generally with respect to our topline revenue that in the same way that when we had an up 84% quarter in the first quarter of '21, or when we had an up over 50% quarter for the year of 2021, it's all part of our growth story, which will be up and down and will not be quarter to quarter.

We have -- we feel very good about the development of our franchise across our industry groups and product areas and regions. And we're undaunted with respect to our -- the pursuit of our growth story.

Thanks for that color. And maybe my follow-up just for Gary -- you've been consistent in the messaging that organic growth is the highest priority with regards to capital management. But you're already near your recruiting bogey for the full year, just on a year-to-date basis in terms of net new adds. Your stock price, it's down more than 40% year to date with significant capacity to accelerate the share repurchase.

I just want to better understand the framework or approach, just in terms of ROI, whether the return on investment on buyback is better than simply adding more partners here, given the capacity to accelerate repurchase as well as a challenging macro backdrop?

I don't think the two, Steve, are mutually exclusive. We -- not only do we have the cash to invest in both, but, frankly, most of the partner acquisition or lateral hire acquisition isn't usually a cash acquisition anyways, it's usually a share acquisition. So really, we look at the capital management on terms of ordinary day-to-day operations as separate now. Obviously, there could be specific situations where having cash as dry powder is important, but we're not constrained in that regard today.

So we actually have -- as you know, the Board authorized our repurchase program in February. We very shortly thereafter gave instructions to our brokers to start that. We were advised by counsel that we should wait about -- wait a while for a cooling off period, just given some of the recent SEC proposed regulations relating to 10b5-1 repurchases. And we've really since then been in the market as aggressively as our brokers advise us to be so that we're not obviously moving the market and so forth in an open market program.

And Gary, could you just help frame how we should think about the cadence for share repurchase? I mean, recognizing that you've built in some flexibility into -- presumably into the program. I just want to better understand how we should think about the cadence as we start to think about the modeling of the share count trajectory from here.

Yes, Steve, I mean, look, in terms of the full year, obviously, we're going to look at things in the market environment at the time, so I'm not going to give a prediction for the full year. I will just -- to put it in context so far, since the program started, we've been repurchasing at a clip of probably on average about 150,000 shares a week. That's where we've been thus far. And so that's probably the best comment I can make that gives you some color on that program.

Sufficient color, Gary. Thanks so much for taking my questions.

Sure. Thank you, Steve.

Michael Brown, KBW.

Great, thanks. Morning, Peter, Gary, Taylor. How's everyone?

Good morning.

Hey, Michael.

Most of mine have been asked. I just wanted to maybe follow up on the outlook commentary here for 2Q specifically. So certainly understand that there's quarterly volatility here and that's inherent in the business. So appreciate that you are able to give some guidance here for us in 2Q.

When I look at the business models here, the operating leverage is generally limited in these down revenue type of environments, and especially when you have down environments that are more quarterly -- more quarterly noise, if you will, versus a full-year situation.

So as we think about 2Q, and you talked about revenue being down significantly from 1Q, is it still fair though, that you can produce positive net income in that environment, just given where you're accruing comp and T&E is on the rise a bit here?

So Michael, is your question can we generate positive net income in the current environment? Yes, we believe we can, certainly on an adjusted basis, we can. Look, we -- as we think about not just -- I'll comment on some questions you haven't [answered], but just to give a little bit of further color, as we think about margins.

Obviously, you have the two main components on the comp margin we accrued for the first quarter, consistent with our guidance that we gave in the past, it's the mid 60s and we create a 64% rate. And that mid-60s band is one that we're going to -- we would expect and try to stay very much within barring pretty unusual circumstances.

And on the non-comp side, the investments that we're making there are kind of long-term investments. A good portion of the non-comp margin is relatively fixed, but there are things at the margin where we can make adjustments if we need to. And we think it's the right thing to do. The way we think about non-comp expense is we try to be very disciplined in where we're spending. And where we have some higher non-comp expense today, it's very specifically for investments in the business for the long term.

Okay. Great. So it does sound like 2Q will, even with the revenues down, EPS will still be positive, okay.

Well, I'm not going to predict EPS for the quarter. But you can extrapolate from the margin guidance that we've given so far. And really obviously, if you were to assume zero revenues, which I wouldn't. (inaudible) not going to get there.

And apologies if I missed it, you ended the quarter with $223 million of cash and we're all trying to toggle what's considered your excess cash. Obviously, been buying back stock in the second quarter here, so that number has changed. But how do you think about what is truly excess? And I know that's probably a moving target, but if you had to frame a range -- how do you think about that number is?

Yeah. I mean, the way we think about the cash balances is there's some amount that we are -- that we set aside which is not excess, which is working capital needs is part of it. There's a component that we will assume is amounts that we need to retain for specifically identified items like our headquarters buildout, which we said we expect that could be north of $50 million of capital. So that's a part of it.

There's an aspect of keeping some amount of dry powder there, so that we have the flexibility to take advantage of opportunities as they come up. And the remainder of that is excess. And we can't -- we're not going to be very specific on a number. However, what I will say is today, we definitely feel that we have excess cash even after the buybacks today, which is why our intention is to continue to look at ways of returning capital to shareholders in the current environment.

Okay, great. Thanks for taking my questions.

Ken Worthington, JPMorgan.

Hi, good morning. This is Brian Fitzgerald on for Ken Worthington. So I wanted to ask about the outlook for banking in the energy sector. So given what's happening in Europe and the changes in energy sourcing and pricing, what are you guys seeing in terms of a changing dialogue for energy M&A?

And then, Gary, on last quarter's call, you spoke towards excessive cash flows going to capital return rather than M&A, so is that still the case? And then more broadly, what are you seeing in the energy pipeline? Thank you.

Sure. Well, Brian, I'll take the first part of that. With respect to our energy business, I would say that historically, rising energy prices has created M&A activity because it obviously creates earnings and confidence and the resources to transact.

Now working with that are a couple of different factors which complicate an otherwise very bullish picture. One is just volatility in oil and gas prices, of course, but also the difference between the spot market and the futures market three, four, five years out, which just creates hurdles with respect to negotiating deals and price discovery.

Like the rest of our business, we have a lot going on. We have an enormous number of conversations and touch points in the energy space around the world. And it's a very important and interesting area for us. But that's how I would characterize on the energy opportunity right now.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Weinberg for any closing remarks.

Great. Thanks very much, operator. Thank you all for joining. And we look forward to following up with you at any time and appreciate being on the call this morning. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.