Perella Weinberg Partners (NASDAQ:PWP) Q4 2022 Earnings Call Transcript

Perella Weinberg Partners (NASDAQ:PWP) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning and welcome to the Perella Weinberg Partners’ Full Year and Fourth Quarter 2022 Earnings Conference Call. During today’s discussion, all callers will be placed in listen-only mode and following managements’ prepared remarks, the conference will be open for questions from the research community. This conference is being recorded. At this time, I’d like to turn the conference over to Taylor Reinhardt, Head of Investor Relations. Please go ahead.

Taylor Reinhardt: Thank you, operator and welcome to our full year and fourth quarter 2022 earnings call. Joining me today are Peter Weinberg, Founding partner and Chairman; Andrew Bednar, Chief Executive Officer; and Gary Barancik, Chief Financial Officer. Areeplay 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 February 16th, 2023. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 9, 2023 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 risk, 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 filing 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 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.

Peter Weinberg: Thank you, Taylor. Good morning everybody and thank you all for joining us on our earnings call. I will take a few moments to review our 2022 results and accomplishments and then turn the call over to Andrew and Gary to discuss outlook and financials respectively. Before I start though, I just wanted to acknowledge that we lost one of our colleagues who prematurely passed away very recently. He was a friend and a member of the PWP family and I wanted to take a moment to acknowledge his passing and reiterate our deepest condolences to his family. So, this morning, we reported full year revenues of $632 million, adjusted pre-tax income of $98 million, and adjusted EPS of $0.78 a share. Our topline results, while down 21% versus the prior year’s record performance, are strong in the context of the tumultuous environment of 2022, an achievement which speaks to the tenacity of our team and the commitment of our clients within a challenged market backdrop.

Within our traditional M&A business and in line with market trends, we experienced a broad base contraction in activity levels across industries. That said, industrials, financial technology, and healthcare represent positive performance. While European M&A faced many headwinds this year, the completion of a few large deals on our platform supportive stable absolute revenue contribution from this geography year-over-year. These attributed to our financing and capital solutions business, which includes global restructuring, capital markets advisory and private capital placement were up in 2022. A trend we hope to see continue as we further invest in this business and diversify the scope of our clients solutions. Andrew will speak more to the importance of this growth opportunity shortly.

To me as both the founder and shareholder, the value of our franchise is measured by more than just financial metrics. And I would like to quickly touch on a few of these items, which defined our success during the year. In 2022, we were a trusted advisor on the largest bankruptcy, largest completed private, the largest public debt restructuring in US history, and several complex spin-offs. We were involved in some of the most significant M&A transactions both in the US and Europe, and solidified our position as a preeminent ESG advisor, an area of focus for our clients across industries and geographies. These high profile deals are not only great for our brand; they also showcase our commitment to broadening our product suite and moving our capabilities and competence beyond traditional advisory.

We continue to invest in top notch senior talent and cultivate talent from within. As of December 31, 2022, we had 64 partners and 47 managing directors in our advisory business. These figures; include eight partners, and 14 Managing Directors who were added to the platform in 2022 both as lateral hires and internal promotes. Through external hiring, we have broadened our product sector and geographic reach and have begun realizing synergies across the business. The future productivity potential from these newly made partners and MVs alone is tremendous. And finally, we acted on our commitment to return capital in total returning north of a $100 million in 2022. After announcing a $100 million share repurchase authorization in February 2022, we have deployed approximately 75% of it in under a year’s time.

And we announced this morning an incremental 100 million dollar authorization. Our new authorization reflects our continued commitment to our capital return objectives. We have also paid out a consistent quarterly dividend of $0.07 a share, and further mitigated dilution via net settlement of vesting employee RSUs. Well, this is my last earnings call, I will remain very involved in the firm as Chairman of the Board of Directors and as an active partner. Andrew has my full support and I strongly believe PWP is best days lie ahead. On that note, Andrew, I will turn it over to you.

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Andrew Bednar: Hi and thank you, Peter for your dedication and leadership and for your continued partnership. Today I’m honored and excited to be speaking with all of you on my first call as CEO. The firm’s accomplishments Peter just outlined are quite remarkable, given the structural headwinds we and our industry faced in 2022. Throughout the year, the narrative from us and our peers was largely aligned. We are in a more challenging operating environment. Client dialogue remains active and gross backlogs are full, but there is significant elongation and increased risk within transaction completion timelines. Over the past few months, we have started to see a subtle yet important shift in client behavior and in confidence levels.

As we have alluded to before, when markets gain some clarity as is happening real time on rates and inflation, parties explore transactions in pursuit of their strategic priorities. To be sure the market is still turbulent, financing is more difficult, and comes at a higher cost than we have all become accustomed to. And transactions still need to get from announcement to close. But it does feel like the range of uncertainty has narrowed. And that is a step in the right direction. Looking beyond this quarter, let me speak to our strategy. Our singular focus is and will continue to be providing financial and strategic solutions to our clients across our platform, especially in connection with their most complex financial and strategic challenges.

Our focus is on scaling the franchise’s we’ve already built, so we can broadly serve the needs of our current clients, while also expanding our client footprint. Senior external hires, who can broaden our industry and product expertise will be the key to above market growth, as well top performers who rise through our ranks internally. Our advisory partner MD count today of 65 and 51, respectively, reflects the 2023 elevation of a number of individuals who embody PWP values, trust, integrity and teamwork, who are well respected by the colleagues and clients, who will contribute to our top line going forward. Expanding and optimizing our financing and capital solutions business was a priority in 2022 and will continue to be a focus in 2023. As the complexity of capital markets has increased, so too has demand to independent advice around financing and capital structure, both in the context of M&A transactions, as well as standalone.

We made several important hires in this area, and their close collaboration with industry sector bankers will ensure that we are leveraging the combined expertise of our teams to provide the best advice to our clients. As we further scale our platform and expand our client footprint and our capabilities, our revenue streams become larger and more diversified, allowing us to realize operating leverage and grow earnings. I have discussed with our team internally the importance of goal setting, continuous improvement and delivering for our stakeholders from clients to shareholders. As we continue to execute against our strategic priorities, we have set a first financial objective of achieving annual revenues in excess of $1 billion. At $1 billion in revenue, we can more efficiently leverage our infrastructure to drive profitability and create shareholder value, as well as attractively compensated our team for their performance and enhance our ability to invest in new talent.

Each of our senior bankers as an individual performance metric, but now all of us have a firm wide revenue objective as well. Gary, I will now turn the call over to you to discuss our results in more detail.

Gary Barancik: Thank you, Andrew. As it pertains to our fourth quarter revenue, the surprise to the upside versus our previous expectation can be attributed to some seasonality experienced across the firm, as well as the timing of a few large key events, and once again demonstrates how difficult it can be to predict the quarter’s performance in our business. We do not expect our first quarter results to benefit from seasonality as our fourth quarter did. As a reminder, 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 the reconciliation of GAAP to adjusted results can be found in our earnings press release which is on our website.

On the expense side, our adjusted compensation margin of 66.7% for 2022 is above where we accrued during the first nine months of the year. As I discussed on our third quarter earnings call, and setting our compensation margin for the fourth quarter and the year, we carefully considered the business performance, market environment and the compensation levels needed to attract and retain key talent and decided a modest increase. But still within our medium term guidance of mid 60s was proven for the full year 2022. We view this investment in our team and our platform as the most important type of CapEx decision we can make in account driven business, and one which should further our long term value creation. As a result of setting our full year compensation margin at 66.7%, together with our third quarter year-to-date accruals at 64%.Our effective fourth quarter ratio was 73.2%.

Our adjusted non compensation expense was $123 million for the full year 2022 flat year-over-year and $32 million for the fourth quarter down 9% from the same period last year. Our full year non-comp spend came in lower than expectations provided on the third quarter earnings call and well below our expectations at the beginning of 2022. Specifically, our fourth quarter expense benefited from lower legal recruiting and other professional fees than we had forecast. Throughout 2022, we were able to realize cost savings and reduce legal consulting and D&O insurance spend as our tenure as a public company grew, and lower rent and D&A expense as our headquarter locations reached the end of their initial lease terms. As it pertains to 2023, we expect an increase in non-comp spending of approximately 15% to 20% over this past year, due to an anticipated overlapping of GAAP rents in New York, a step up in depreciation expense related to our new headquarters and increase in legal expenses and technology related investments some assume continued increase in travel and related spend continued investment in talent and inflationary pressures.

That said, and as 2022 demonstrated, we continue to look for opportunities to realize cost savings, especially in more challenging operating environments. Let me briefly provide an update on our London and New York headquarters projects. We moved into our new London headquarters this past Monday and 2023 rent expense related to that office will approximate our go forward run rate. Our New York headquarters renovation is underway and we expect it to be completed by the fourth quarter. We should have approximately three quarters of overlapping rents in our swing space as we renovate. In both locations, we have free rent periods which mitigate the cost of overlapping rent and build that cost. As mentioned previously, both leases were secured on attractive terms, increasing our overall square footage in those offices by approximately 20% with no increase in 2023 or 2024 rent expense, versus 2021.

A new construction work will drive a material increase in the depreciation expense component of our non-comp expense in 2023 and beyond. We reported adjusted operating income of $87 million for 2022 and $17 million for the fourth quarter. Adjusted operating margins were 13.8% and 9.2%, respectively. Our adjusted non-operating income of approximately $11 million for the full year included nearly $7 million in net gains related to FX revaluation and realizations. During the fourth quarter, the relative weakening of the US dollar translated into unrealized FX losses for our quarterly P&L and reversed some of the net FX gains earlier in the year. As noted in prior quarters, we believe the majority of the net FX gains recorded in 2022 have no economic substance to our business as they’re the result of the revaluation of US dollar denominated cash and intercompany receivables and payables held by our foreign subsidiaries.

Adjusted net income totaled $82 million for 2022 and $12 million for the fourth quarter. Our adjusted if-converted net income was $70 million and $10 million, respectively, and presents our results as if all partnership units have converted the shares of common stock. Adjusted diluted if-converted net income per Class A share was $078 for the full year and $0.11 for the three months ended December 31, 2022. For the year-to-date period, our adjusted as-if-converted tax rate was approximately 28%, relatively in line with our expectations at September 30. Turning to capital management. In 2022, we returned $104 million through the repurchase of approximately 9.5 million shares in the open market, the net settlement of more than 1 million shares to satisfy tax obligations in lieu of share issuances, and the payment of $25.7 million in pro-rata distributions to limited partners, which allowed PWP to pay dividends of $12.8 million to its Class A shareholders.

Year-to-date 2023, we remained active in the open market and had deployed an additional $5 million in share repurchases. The Board has declared a quarterly dividend and $0.07 per share payable on March 10, 2023 to holders of record as of February 28, 2023. As of December 31, 2022, we held $312 million of cash, cash equivalents and short-term investments in US Treasury securities. We have no debt and had an undrawn revolving credit facility. With that, we’ll now turn the call back to the Operator to open the line for questions.

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Q&A Session

Operator: Thank you, sir. We’ll take our first question from Devin Ryan with JMP Securities. Your line is open.

Devin Ryan: Hey, good morning, Peter, Andrew and Gary. Thanks for taking the questions.

Peter Weinberg: Good morning.

Andrew Bednar: Hi, Devin.

Devin Ryan: Hi. I guess maybe just want to start on the current operating environment. You guys were I think early last year to point out some of the turn in sentiment. And appreciate that the environment remains uncertain. But good to hear about maybe some of the recent improvement that you’re seeing in sentiment. So be great to maybe just add a little bit more context on how that’s evolving. Whether geographically Europe versus US activity, corporates versus sponsors, I’m just trying to get sense that that’s kind of a blanket comment of what you’re seeing, maybe in some of the — maybe the recent green shoots or are there some different themes that are emerging amongst either geographies or product types or client types? Thanks.

Peter Weinberg: Yes, sure, Devin. So, I think, last year, as I mentioned in the comments up front, there was very consistent alignment with our peers, and that is a relatively unconstructive macro backdrop for 2022. I think that in the first few weeks at 2023, I’d say the macro backdrop has improved. It’s less unconstructive, but I wouldn’t say that it’s incredibly positive, sort of going into 23. We still have a lot of headwinds that that we and the peer group will grapple with. I think financing markets are opening, but they’re not open. And so, you do have windows of open credit. You’ve had a bit of rallying here in the first couple of weeks. But it’s very, very different from the 2021 backdrop, where you had wide open credit markets, not only in availability and size, but also very attractive rates.

And so, that does tend to sideline financial sponsors and sort of credit-oriented acquisition activity. And so, we’re seeing, a bit of a retrenchment for sure. And sponsor activity, I think that’s very natural. When you have had such a rapid change in the rate environment, you have, typically buyers resetting on valuation faster than sellers. And so that is very natural disruption. I think that will change. PE will have to deploy capital. That’s their job. And I do think it will come back with respect to corporates. It is an interesting environment that we see, because they’re seeing less sponsors competing for assets that have been on their wish list for many years, and find themselves flush with cash and decent valuations. And so from a corporate buyer perspective, it’s actually a quite attractive environment.

And that’s why I think you hear from us that overall client activity, especially with our within our core base of clients in the corporate world, it’s very, very active dialogue. So we’re encouraged by that level of dialogue that’s been ongoing. And you’re starting to see some of the plumbing that’s been backed up in that market, unclog. And then lastly, you had a question, I think about just the European and the rest of the world versus U.S. not really seeing a big difference in activity there. It’s pretty balanced in terms of our historic contributions from both Europe and the U.S. I do think, as I said, in my upfront comments, the range of uncertainty of outcomes has narrowed with respect to rates. We’re in a round the back half of these rate increases, it seems.

And with respect to Europe, I think the worst case scenarios that were outlined, post the invasion of Ukraine have really turned out to be significantly better than again, those worst case scenarios, which takes away a lot of uncertainty.

Devin Ryan: Okay, great color. Thank you, just as a follow-up Andrew on the billion dollar revenue goal, just to give you more contexts there. What are some of the profitability metrics potentially look like? If that more revenue, I appreciate, you’ll have more to pay, et cetera. But like, how should we think about, maybe what the comp ratio trend could look like? And then also, what you need to meaningfully larger infrastructure to get there, which would imply and usually hired non-GAAP costs, just trying to think about kind of what that billion dollars means for actually profitability? Thanks.

Andrew Bednar: Yeah. Sure. So I don’t think our long term comp margin target of mid-60s which we’ve outlined historically, both in our original IPO process, and then with you all on our quarterly calls changes as we move through that initial revenue target. I think what does drive bottom-line earnings is that we have enormous operating leverage in non-comp. And so I don’t see a material increase in non-comp required for us to achieve a consistent billion-dollar plus revenue target.

Devin Ryan: All right, great. I’ll leave it there. I hop back in queue. Thanks very much.

Andrew Bednar: Thanks, Devin.

Operator: Thank you. Our next question will come from James Yaro with Goldman Sachs. Your line is open.

James Yaro: Good morning. I just wanted to touch on the restructuring backdrop that you’re seeing at this point, you talked about financing markets, opening but not being fully open. Has this impacted restructuring? And do you think it’s a risk to that restructuring backdrop, if markets fully reopen?

Andrew Bednar: Yeah, thanks for the question, James. We have seen a very significant increase in our overall capital solutions and financing business. So within our financing and capital solutions business, that includes restructuring, liability management, debt advisory and private capital markets business that generally has picked up quite significantly through the course of fourth quarter and continues in Q1. I think credit markets are going to remain volatile. As I mentioned, upfront, there are windows that are opening and closing, we don’t have a consistently open market. We also have realized within our corporate client base, we have a number of finance executives and CFOs that have really not seen this type of market.

And in fact, many of many of us haven’t with such a rapid rise in rates, and so much of the market hanging on to every Fed word. And so that’s a challenge of where executives that needs to think about their financing, are seeing a market where they need some help and guidance and our teams are providing that guidance and we’re able to be involved in transactions where it’s not just you know call 911, I have a potential bankruptcy, but extends much further beyond that, it’s a perfectly healthy companies that need assistance in accessing markets and managing maturities.

James Yaro: That’s very clear. I just want to touch on the capital return priorities from here. You did increase the share repurchase authorization score by I think 100 million. So when you just think about the cadence of capital return, should we expect buybacks to operate to be a sort of this 4Q 2022 level, or could they increase or decrease from here? And then is there any ability to contextualize a minimum cash balance that you think about — that you feel comfortable operating at?