PJT Partners Inc. (NYSE:PJT) Q1 2018 Results Earnings Conference Call May 2, 2018 8:30 AM ET
Sharon Pearson - Head of Investor Relations
Paul Taubman - Chairman and Chief Executive Officer
Helen Meates - Chief Financial Officer
Devin Ryan - JMP Securities
Mike Needham - Bank of America Merrill Lynch
Sumeet Mody - Sandler O'Neill & Partners LP
Chris Walsh - The Buckingham Research Group
Good day, ladies and gentlemen, and welcome to the PJT Partners Q1 2018 earnings call. My name is Joyce and I'm the moderator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Sharon Pearson, Head of Investor Relations. Please proceed.
Thanks very much, Joyce. And good morning and welcome to the PJT Partners first quarter 2018 earnings conference call. Joining me today is Paul Taubman, our Chairman and Chief Executive Officer, and Helen Meates, our Chief Financial Officer.
Before I turn the call over to Paul, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statement.
We believe that these factors are described in the risk factors 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.
Thank you, Sharon. And good morning, everyone. And thank you all for joining us today.
The buildout of our firm remains on track and we continue to make steady progress against our strategic goals, which include integrating three highly complementary businesses to increase market share and better serve clients; significantly expanding our strategic advisory franchise, while continuing to offer clients big firm capabilities with a small firm feel; capitalizing on a much larger market opportunity due to the elimination of legacy conflicts; and perfecting a clearly differentiated culture and brand, which enables us to remain a premier destination for talent.
While it is still early days for our firm, the power of our franchise is evident in the quality of our dialogues, in the increasing number of awarded mandates, in our announced transactions and we are beginning to see it in our reported revenues.
We are increasingly optimistic about the enormous potential inherent in the ongoing integration of our three businesses. This has begun to manifest itself in higher win rates for our restructuring and secondaries businesses.
Our first quarter revenues of $134 million were up 11% notwithstanding challenging year-over-year comparisons in restructuring. Our strategic advisory and Park Hill businesses performed well and were up significantly year-over-year.
However, as we have consistently said, and one thing about us we are consistent, we measure our progress in years, not quarters. Viewed through a year and multiyear lens, we are steadfastly committed to executing on our strategy of building and sustaining a premier global advisory firm.
Turning now to our businesses in a bit more detail. In Park Hill, was up significantly versus year-ago levels as a result of strong overall performance particularly in private equity.
While we have relatively clear visibility on Park Hill's 2018 growth prospects, there will be volatility in its quarter-to-quarter results.
Looking further out, we see increasing opportunities for our Park Hill and strategic advisory businesses to complement each other's relationships and capabilities. We expect these efforts to enhance Park Hill's growth trajectory over time.
Turning to restructuring, we maintained our position as a leading restructuring business. While revenues were down this quarter, our full-year outlook for restructuring remains essentially unchanged from 2017 levels.
The benign credit environment in which we are operating has led to a more muted level of overall restructuring activity. However, we have been largely able to offset any declines through increased win rates.
More and more of our strategic advisory relationships enable us to connect with corporates and sponsors at much earlier stages of their decision-making process.
In strategic advisory, our business had a strong quarter. Our expanded coverage footprint and capabilities have enabled us to broaden our dialogues with a growing number of clients, resulting in our being hired on larger and more complex assignments.
We are competing for and winning an increasing number of significant assignments across industry sectors and regions. Every day that passes, our brand grows in strength, our bankers gain more traction and we improve our competitive position.
And as we have said from the outset, we are hiring best-in-class talent in existing and new industry sectors. We ended the first quarter with 32 partners in strategic advisory compared to 22 partners at the same time last year, up 45%.
Over the past year, we have deepened our domain expertise and presence in industries such as TMT, real estate and industrials and expanded our capital markets capabilities.
We've also built out additional focus areas in energy, financial institutions and financial sponsors and expanded our coverage of European corporates. Our investments in Europe are beginning to pay off and have resulted in a significantly increased number of European and cross-border assignments.
We are encouraged by the momentum in our strategic advisory business. It is important, however, to emphasize that we are still very early in the buildout of our business.
Only 18 of our 32 partners in strategic advisory have been on our platform for at least two years. As that number continues to grow significantly over time, we anticipate that our business activity, as measured by mandates, announcements, revenues and market share will continue to expand.
I will now turn the call over to Helen to review our financial results.
Thank you, Paul. Good morning. Beginning with revenue, total revenues for the quarter were 134 million, up 11% compared with $121 million in the first quarter 2017.
The breakdown of revenues: Advisory revenues were $103 million, up 4% from the same period last year. Growth in both strategic advisory and secondary advisory revenues more than offset a meaningful year-over-year decline in restructuring revenues.
Placement revenues were $26 million, up approximately 34% from the same period last year, with particularly strong year-over-year growth in the private equity vertical.
Other revenues included $2.3 million in reimbursable expenses that we billed to clients during the quarter. As of January this year, those build expenses are now included in other income in accordance with the new revenue recognition standards.
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.
First, adjusted compensation expense. First quarter 2018 adjusted compensation expense was $85.8 million or 64% of revenues compared with $77.4 million, also 64% of revenues in the first quarter 2017. This 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 $26.4 million in the first quarter 2018 and included approximately $2.7 million of expense incurred which is billable to clients and was starkly recorded on the balance sheet.
We're not required to report this expense on the income statement in accordance with the new revenue recognition guidance. On an apples-to-apples basis, excluding the impact of this accounting change, non-compensation expense would have been $23.7 million, up $2.8 million compared with the first quarter 2017. That also compares to a quarterly run rate last year of $23.1 million.
The main driver of the year-over-year increase was higher communications and IT expense, which was primarily due to investments in data management infrastructure.
In addition, increased headcount and business activity resulted in high year-over-year professional fees and travel costs.
We remain focused on our non-compensation expense. While the majority of this expenses is fixed, we expect our variable expense to increase with higher headcount and increased levels of business activity. And as we continue to invest in our business, there will be some lumpiness in our expenses depending on the timing of those investments. However, we do expect to see some operating leverage in our non-comp expense in 2018.
Now, turning to adjusted pretax income, we reported adjusted pretax income of $21.8 million for the first quarter compared with $22.6 million last year and our adjusted pretax margin was 16.3% compared with 18.7% in the first quarter 2017.
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.
And the tax rate also takes into account the tax benefit from the delivery of certain shares during the quarter at a value higher than your amortized cost. We have annualized this benefit, resulting in an effective tax rate for the full year of 22.3%, which is the rate we applied in the first quarter. Had we assumed the full benefit of this tax impact in the first quarter, the effective tax rate would have been 12.1%.
Our adjusted as converted earnings was $0.44 per share for the first quarter compared with $0.38 in the first quarter last year.
For the share account, for the quarter, our weighted average share count was 38.6 million shares. During the latter half of March, 1.25 million performance unit satisfied the $48 share price condition, with 1 million of these units yet to satisfy the time vesting condition.
Despite the fact that the time vesting condition has not been fully met, the full 1.25 million units will be reflected will be reflected in our weighted-average share count in the second quarter.
Additionally, in this first quarter, we repurchased the equivalent of just over 1 million shares through a combination of exchanges, net share settlement of employee tax obligations and other market repurchases.
As we've discussed on prior calls, partnership units which are owned primarily by current and former Blackstone employees can be exchanged on a quarterly basis. We have the option to settle these exchanges in either cash or Class A shares. And to date, we have settled all exchange requests in cash.
We're currently in receipt of exchanger notices for approximately 128,000 partnership units. And as we've done in the past, we will exchange these units for cash.
On the balance sheet, we ended the quarter with $82 million in cash, cash equivalents and short-term investments, $187 million in net working capital and no funded debt.
And finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on June 20 to Class A common shareholders of record as of June 6.
I'll now turn it back to Paul.
Thank you, Helen. Now turning to our outlook, since the inception of our firm, we have maintained our focus on creating a leading global advisory-focused investment bank.
To that end, we have rebuilt the strategic advisory business and added 27 new strategic advisory partners. We have advanced our leading restructuring franchise by leveraging the growing strategic advisory footprint and eliminating legacy conflicts.
We've invested in Park Hill to position the business for future growth, particularly in the secondary advisory and real estate verticals. And we have enhanced our position as a premier destination for best-in-class talent.
We're confident that the power we see in our firm is being increasingly recognized by clients and prospective clients around the globe. Each of our three businesses is meaningfully better positioned for current-year performance than they were a year ago. The progress we've made and the momentum we have in our business, along with the strong partnership culture we have created, give us strong conviction about our long-term growth prospects.
And with that, we will now take your questions.
[Operator Instructions]. The first question comes from the line of Devin Ryan with JMP Securities. Please proceed.
Great. Good morning.
Good morning, Devin.
How are you, guys?
We're great. It's a wonderful day.
Wonderful day. Good. So, I guess, first one here just on recruiting, so the strategic advisory partner headcount had a great trajectory. And even from your end, it's up, I think, 5. So, I know this is tough to predict really until somebody signs on the dotted line. But where do you think you are on the year on the year in terms of recruiting just based on the conversations you're having and the backlog?
And then, just when we think about the comp ratio, I know that's the best estimate on the year, but does that factor in some additional recruiting as well?
I think the answer is it does. We've grown our partner headcount in advisory by 45% year-over-year. We have a very robust hiring pipeline. We expect there to be significant additional hires throughout the year. I can't tell you when, but I'm quite confident that we'll continue to invest and grow our practice. And we have a lot of advanced conversations. And I think when we think about our comp-to-revenue ratio, given all the investment that we're making in our business, at this point in the year, it's prudent to maintain it at the same rate that we had a year ago.
Got it. Thank you. And then, maybe just one on kind of the M&A activity that we're seeing and trying to think about it from a sector perspective. You've been active, PJT has been on some of the high profile TMT deals. I know that's a strength. Can you just maybe talk about some of the themes you're seeing within the various sectors that's driving activity because I know it's not just a broad market. There's individual drivers within the different sectors. And then, maybe where you feel like PJT is seeing the most traction here as you're building out the franchise?
Well, I think the M&A activity that we're seeing is really in most every vertical and in most every developed area of the world. You are seeing tremendous amount of activity here in the States. You are also seeing a great acceleration in activity in Europe. You're seeing an acceleration in activity in Europe. You're seeing an acceleration in cross-border. You're seeing it in industrials. You're seeing it in technology. You're seeing it in most vertical. And I think that's because we're in the midst of both a secular and a cyclical uptick in M&A activity. I think there's no doubt that there's been a secular shift. We've talked about this for a long time.
And I think the new baseline, the new normal of M&A activity is greater today than it was 3, 5, 10 years ago for a number of reasons. And the one that I've focused on the most is this notion of technological disruption and innovation causing companies to rethink their portfolios. I think when you then add to that, the dramatic reduction in corporate tax rates, it reduces friction costs which gives companies less disincentive to not optimize their portfolios. And I think technology affects most everything that gets done.
If you think about what's getting done in the automotive industry, with autonomous and electrification and what that means as far as the need for new technology, new capabilities, that's just one small example. I think that ripples everywhere.
And where we're getting the most traction is in areas where we have gotten to minimum critical mass and been there for some period of time. So, you're seeing that in Europe. We have tremendous project in Europe. We've made a major commitment to Europe. We have a very talented group of people who have been on the platform for some reasonable period of time and they're starting to see a very significant uptick in their another activity. We've made a major investment in industrials practice. We're seeing it there. We've made a major commitment to the real estate and lodging businesses. We've seen it in power and utilities. So, it's a much broader group. And I think we're increasingly well-positioned.
So, our view is we're dealing with a secular uptick and that's not going away. I think we also are – let's be clear – at a cyclical relative high. I think conditions – launch conditions are incredibly hospitable right now in terms of equity valuations, overall GDP growth in developed countries, relative political stability in many of these countries, low interest rates. How long, I don't know.
And one thing about the M&A business, it is cyclical. But it's the secular trend over the long-term that we feel most comfortable at.
Great. Thanks for all that color, Paul. Appreciate it. Maybe just last one here for Helen on expenses. The revenue recognition impact in the quarter, I want to make sure I heard the numbers right, but it sounds it was just under a few million dollars. So, I guess, is that accurate? And then, is it a good number to think about for future quarters?
And then, just more broadly on non-compensation expenses, the first quarter tends to be seasonally lighter. Should we expect that we'll see kind of that trend up as the year progresses or is there anything in this quarter? I heard the commentary. But is there anything else this quarter that we should think about as being kind of lumpy items?
So, in answer to your first question, yes, the billable expenses that were included were about $2.7 million. And so, without any other quarters, I think that's probably a reasonable amount to assume per quarter.
And then, on your question on the first quarter, last year was a very low quarter. We have made some investments in infrastructure. And as I mentioned, a lot of the comps and IT expense was front-end loaded. If you look at last year's run rate of about $23.1 million a quarter, we're running slightly ahead of that. And about two-thirds of our costs are fixed or semi-fixed. So, we do expect with increased headcount and business activity, expenses will be up in that area. But I don't think we have anything significant that we're concerned about as to why Q1 2018 was higher than Q1 2017.
Got it. Great. Very helpful. Thanks a lot, guys.
Thank you, Devin.
The next question comes from the line of Mike Needham with Bank of America Merrill Lynch. Please proceed.
Hey, good morning, guys. So, the first question I have is on the restructuring business. I think the quarter may been a little bit light for that business. Can you give us an idea of how it did to start the year versus the recent trend?
And then, if you could touch on the outlook too, I think you said that 2018 could be in line with 2017. Does that mean there are transaction fees for things that you're working on you expect to get later this year?
I think what I said is a couple of things. The restructuring macroenvironment is clearly muted just right now. It's a very benign credit environment. At the same time, we're a more formidable practice and our win rates have gone up. And net-net, as we look at it, our backlog and our full-year prospects, we see 2018 as being roughly proximate with 2017 performance.
Having said that, in the first quarter, just because of what the first quarter was last year and what the first quarter is this year, it was down considerably. But that's a quarter-to-quarter comparison and that is not reflective of what we see for the full year.
Okay, got it. And the – like, you guys – you gave the year-over-year comparison. I guess, would you characterize the first quarter also as light just versus the recent trend, not picking just one quarter from last year?
I think the first quarter of this year for us will be light relative to its full year, yes.
Okay, got it. Thank you. On the hiring, you guys continue to progress. It seems like you're bringing on quality – senior talent from what we can tell. Some of the other independent firms, I think, is a little bit unique this year. Appeared to be very focused on hiring. Some of it could be the lower tax rates, strong M&A environment. Is that, I guess, competition for movement to similar independent models, affecting competition for talent it all? I would think that your proposition is different because of the amount of white space you have. But I'm just trying to get a sense for how competitive the labor market is this year?
Right. Well, two things there. One is, our hiring is always going to be lumpy because we're focused on a certain type of individual who is a leading banker in his or her space and also fits into our cultural paradigm. And they don't come robotically ex each quarter. And as a result, you will see some quarters where we may not add any or very few. And in other quarters, they will come in in clumps. That is all always going to be the nature of our hiring because we don't start with a quota. We're very confident that over time we're going to get all the white space filled and it's going to be filled with the best athletes. And we're selecting. We're not settling. And the demand to join our firm grows every day that we're more successful. People have more friends who are here, who successfully migrated to this platform, who are winning off of this platform. So, we're supremely confident in our ability moving forward. I would also say that the preponderance of people who join our firm are incredibly successful at their incumbent firm and have decided that they're going to leave a terrific opportunity for something that is truly differentiated, unique, exciting, entrepreneurial and help them win even more. And on that basis, we're really competing most times with the status quo, just staying where they are as opposed to another firm. And in those rare instances where we do compete because someone else has also identified some individual, I'm quite comfortable with our win rates. So, while others may be hiring, they can speak to their hiring agendas. I'm quite confident that we're able to get all the folks that we'd like on our platform. Today no different than it was a year ago. And if anything, it's probably easier today just because people have a clearer picture of where we are and, more importantly, where we're headed.
Okay. Thanks, Paul.
The next question comes from the line of Sumeet Mody with Sandler O'Neill. Please proceed.
Hey, good morning, guys.
A quick question for me. Just a follow-up on the European activity you guys are seeing. It looks like the second quarter is starting to show some pretty good signs of life there. And it looks like it was a pretty contributor in the quarter as well. Just wanted to get your thoughts on how you're feeling that activity is going in that region going forward? Do you think it's something that's more sustained or maybe something that's maybe lumpier going forward? Maybe how are the conversations going with clients in that region maybe?
Well, first of all, M&A is always going to be lumpy. And nothing is ever going to change that. And it doesn't matter whether it's in Frankfurt, Munich, Paris and New York or Palo Alto. It's always going to be a lumpy business and it's going to be episodic. I think, as I said, over a long time, I'm quite comfortable with the longer-term secular trend, which is up into the right, but you're going to see a lot of volatility constantly in all of these markets.
Why are we so excited about Europe? We're excited about Europe for a couple of reasons? Number one, it just so happens that while we have a small footprint in Europe, as a percentage of our footprint, we have arguably a greater percentage of our senior bankers in Europe than any of our competitors or certainly most of our competitors.
Second, because we are such a tightknit collaborative organization, our ability to serve clients on a global basis on cross-border transactions is arguably differentiated because of the way everyone works together and organizes around clients.
In addition, I think the European market, while it has clearly seen an inflection in M&A activity and it's likely to continue, the independent model is arguably is less developed in Europe than it is in the US and, therefore, we sort of have the best of both worlds. We are late to the party which means we get to build this out with a blank sheet of paper post financial crisis the way in which it should be built out and the way in which resonates with others. But we're not dealing with the same competitive set that has a greater head start.
And then, finally, I think if you're focused on best-in-class industry bankers, you need to be global and inevitably the dialogues, whether they start in the US, start in Europe, start in Asia, start in start Latin America, they all require a global network.
And one of the things that we're most proud of is, with relatively few offices, we're representing clients in nearly 50 countries around the world. And that, to me, is the mark of a best-in-class global franchise without necessarily having offices everywhere.
Okay. Great. That's great color. Thanks a lot for your questions.
Sure, thank you.
The final question comes from the line of Chris Walsh with Buckingham Research Group. Please proceed.
Hello, good morning.
Good morning. So, it seems like last quarter, we were talking about market volatility and its potential impact on M&A moving forward. And then, now, we have macro headwinds such as protectionism with certain industries, potential risk events, whether it be antitrust or other. What are some of the things clients are worried about currently, Paul, from a macro perspective?
Look, one thing is large deals seem very difficult to get done. I was looking at a statistic recently of large deals that were announced over the last few years. And if you go back, there are still a significant number of large transactions announced in 2016 that have yet to close. And for a variety of reasons. It's either an antitrust review. It's the inability to get regulatory approvals everywhere around the globe. It's because of intervening shareowners who, with the passage of time, have wanted to revisit the valuation that was paid and it's been difficult to get a shareholder vote and on and on. And I think it's a difficult world out there. And I think many clients are betwixt and between, which is they see the world moving and moving at a quickened pace. And as the world speeds up and as these deals take longer and longer to complete, the idea of deferring strategic activity for a period of time only to revisit it and then start the clock anew, that's not particularly inviting. On the other hand, these deals have shown that there are a lot of interested parties who in one way or another directly or indirectly have a voice. And as a result. it has created a push-pull situation where there is risk in moving sooner and there's risk in deferring decisions. And I think that's one of the biggest situations.
The other is, just because companies have strategic imperatives, finding the right partner where the business fit is appropriate, the valuation lines up, there's a high degree of success, there's confidence of either low or no interloper risk, it's a difficult, elaborate chess game, but the good thing about it is the more complicated the world, the more advice is recognized and valued. And that is an environment that plays to our strength.
Yeah. That makes sense. And it's helpful. Thank you. And then, just one quick follow-up on the placement business. You mentioned growth there was being driven by private equity this quarter within all of the different verticals. Was it driven overwhelmingly by private equity? I know last quarter you mentioned real estate as a likely near-term driver and you could just briefly touch upon the synergies within placement and the M&A business, that would be helpful.
It's one of these things where there may well be a different story every quarter and there is going to be volatility quarter to quarter in that business. It's a remarkably steady business measured year-over-year. It moves around a great deal and it moves a great deal as far as the contributors. I think all of the businesses performed well in the first quarter. They were either flat or all up. So, there was really just good news everywhere in the quarter, but that doesn't mean it gets repeated in every single quarter and every single vertical.
I think where we see the most immediate opportunity is in the GP space. And there is a tremendous opportunity to help sophisticated GPs think through particular objectives fund by fund as to how to either create liquidity, enhance their fundraising, redistribute some of the economic incentives to their next generation, there is a whole bevy of strategic initiatives. And as we have a broader strategic advisory platform, that brings with it very close relationships with decision-makers at many of these alternative asset managers. As we continue to focus on building out our sponsored business, you have a hand-in-glove approach to this. So, we've got best-in-class structuring and distribution and placement. And now, if you marry that with a front-end sales force, it's quite powerful.
Great, thank you.
Thank you very much.
I don't believe there any more questions. So, with that, I wish everyone a good day. And we will speak to you on our next earnings call. Thank you.