PJT Partners Inc. (NYSE:PJT) Q3 2023 Earnings Call Transcript

PJT Partners Inc. (NYSE:PJT) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good day, and welcome to the PJT Partners Third 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.

Sharon Pearson: Thank you very much, Todd. Good morning, and welcome to the PJT Partners third 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’ 2022 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.

Paul Taubman: Thank you, Sharon. And thank you all for joining us this morning. Before we turn our attention to our financial results, please allow me to make a few comments. This month, the world has witnessed barbaric unspeakable acts perpetrated by a terrorist organization against civilians in Israel. We express our outrage against such acts, and we had our voice calling for the immediate release of those held hostage. We see the extraordinary suffering of innocent civilians in Israel and Gaza, and we are heartbroken. In an effort to do our part PJT is committing funds to aid humanitarian relief efforts in Israel and Gaza. Now turning to our results, we continue to operate in a difficult environment as higher rates, tighter monetary conditions, increased economic uncertainty, and a fought geopolitical landscape all the way on markets globally.

These pressures continue to dampen capital formation and global M&A activity, with equity issuance levels, and current M&A volumes down to levels comparable to a decade or so ago. In contrast, this year, the number of U.S. bankruptcy filings is tracking to levels not previously reached in more than a decade. Against this backdrop, our unique combination of businesses and collaborative team approach delivered superior outcomes for clients and outperformance for our firm. Our nine-month revenues grew 11% year-over-year, with a record of 825 million in revenues. After Helen takes you through our financial results, I will review our performance by business, provide more detail on our recruiting efforts and update our full year outlook. Helen?

Helen Meates: Thank you, Paul. Good morning. Beginning with revenues, total revenues for the third quarter were $278 million, up 5% year-over-year. A significant increase in restructuring revenues more than offset continued weakness and PJT Park Hill and lower revenues in strategic advisory compared to a year ago level. Total revenues that met the criteria to be pulled forward in the third quarter were approximately $5 million compared with approximately $3 million in the same period last year. For the nine months ended September 30, total revenues were $825 million as Paul mentioned, a record first nine months and an increase of 11% year-over-year. A significant increase in restructuring revenues more than offset a significant decline and PJT Park Hill and a modest decline in strategic advisory compared to a year ago levels.

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. We have continued to accrue adjusted compensation expense at 69.5% of revenues for the first nine months of the year. This ratio represents our current expectation for the full year 2023. Turning to adjusted non-compensation expense, total adjusted non-compensation expense was $41 million for the third quarter, up $4 million year-over-year, and $122 million for the nine months up $13 million year-over-year. As a percentage of revenues, adjusted non-compensation expense was 14.8% for both the third quarter and nine months periods. Adjusted non-compensation expense grew 12% in the first nine months of the year compared to the same period last year.

And we expect the full year growth rate to be in line with that nine-month growth rate, with full year increases driven by higher professional fees, higher occupancy costs, as well as increased travel and entertainment expense. We reported adjusted pretax income of $44 million for the first quarter and $130 million for the first nine months. Our adjusted pretax margin was 15.7% for both the third quarter and then that’s periods, this compares to 20.3% and 21.4% for the three and nine-month periods last year. The provisions of taxes, as with the prior quarters, we presented our results as if all partnership units had been converted to shares and all of our income was taxed at a corporate tax rates. Our effective tax rates for the first nine months of 2023 was 26.7% and we expect this to be our effective tax rate for the full year.

The earnings per share are adjusted as converted earnings were $0.78 for the third quarter, and $2.30 per share for the first nine months. On the share count, for the quarter our weighted average share count was 41.4 million shares, including the exchange of partnership units for cash, our repurchases in the first nine months totaled approximately 2 million shares slightly higher than a year ago levels. On the balance sheet, we ended the quarter with $355 million in cash cash equivalents and short term investments, and $370 million in net working capital, and we have no funded debt outstanding. Finally, the board has approved a dividend of $0.25 per share. The dividends will be paid on December 20, 2023 to Class A common shareholders of record as of December 6.

I’ll turn back to Paul.

Paul Taubman: Thank you, Helen. Beginning with restructuring. We’re experiencing a wave of opportunity not seen in more than a decade, as many companies grapple with an increasing array of challenges, pressured business models, over-leveraged balance sheets, unfavorable credit markets and higher financings. We continue to believe that this balance sheet repair cycle will persist for an extended period of time, as the pressure on business models becomes more broad based and more companies are impacted by higher interest rates and more restrictive credit conditions. Consistent with this commentary, our world-class restructuring business continued its strong momentum and leadership position, with revenues for the three-month and nine-month periods up substantially compared to a year ago levels.

Turning to PJT Park Hill, the fundraising environment for alternative investments remains extremely challenging, with the hangover from record 2021 fundraising continuing to constrain investor appetite for new commitments. Subdued IPO and M&A activity has further weighed on new fundraising activity due to the anemic pace of capital return. As a result, many new fundraisers are being scaled down and taken considerably longer to complete. Against this backdrop, our three and nine months’ revenues in PJT Park Hill were down significantly year-on-year. Turning to strategic advisory. Notwithstanding the recent state of M&A activity, 2023 is shaping up to be the lowest level of deal making in nearly a decade. And when measured as a percentage of global GDP and global market capitalization, M&A activity is at unprecedented low levels.

Our strategic advisory business is not immune to the slowdown with revenues. And for both the three and nine months periods. However, our business continues to perform well on a relative basis with revenue declines meaningfully less than declines in overall M&A activity. While it is always perilous to call the bottom of any market, we have the utmost confidence that market conditions will improve, and that global M&A volumes will in time, return to levels more in line with historical relationships to global GDP, and global market capitalization. Our focus remains on ensuring that we are well positioned for the inevitable market recovery. To that end, we remain actively engaged with clients on a broad array of strategic topics. Our pipeline of mandates has steadily grown throughout the year, and it’s meaningfully stronger today than it was at the beginning of the year.

Turning to talent, we continue to expand our capabilities through the addition of high quality talent. We previously communicated that this would be our most consequential hiring year ever, as the subdued M&A marketplace presents us with a unique opportunity to accelerate the pace of senior hiring. Year-to-date, we have hired 17 partners and MDs, strengthening our market position across many industry verticals, including consumer healthcare, industrials, infrastructure, and technology. We expect these elevated recruiting levels to continue into 2024. We remain steadfast in our focus on long-term shareholder value, and view this recruiting momentum as an important driver of value creation. While we expect substantial returns from these recruiting efforts over the intermediate to long-term, these investments will pressure margins in the near term.

As we look ahead, we expect our full year revenues to be the highest in our firm’s history, notwithstanding extraordinarily volatile markets and significant macro headwinds. We remain confident that the businesses we continue to build and integrate position us to weather this challenging environment and to thrive as market conditions improve. Our valid set of businesses enables us to provide clients with differentiated advice and reward shareholders with differentiated performance. And with that, we will now take your questions.

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Q&A Session

Operator: Thank you. In essence time the floor is now open for your questions. [Operator Instructions] Our first question will come from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan : Great morning, everyone. How are you guys?

Paul Taubman: We are well, Devin. Thank you.

Devin Ryan : I want to start on the restructuring business strength. Clearly, you’re seeing a nice contribution year-to-date. And I think your restructuring results are kind of hitting earlier than some of your peers where we’re tracking growing mandates, but then you have to see much uplift there so far. So just want to get a sense of whether you feel like that’s mix. I understand you have a leading business here, but just kind of why it’s coming in earlier. And then, Paul, it does sound like you’re still pretty bullish on the potential for this business and could remain structurally higher. So I’m just trying to think about whether that could actually mean growth for PJT from what are good levels or if we’re just kind of in a higher baseline right now, and that just continues. Thanks.

Paul Taubman: Well, there’s no doubt we’re in a higher for longer restructuring cycle. And we’ve talked about this for some period of time. I think there are many businesses that were substantially weakened as a result of COVID. There was an environment where companies that were over leveraged had extraordinarily benign access to capital, seemingly low interest rates. None of those sort of life rafts, are available today. And as we look at the dialogues that we’re having, the mandates that we’re winning, we have conviction that this balance sheet repair cycle is going to have legs. Now like any cycle, it has ebbs and flows, so every day is not just simply a pickup in activity, but we do believe taking a step back that, that these elevated levels should continue for some period of time as access to capital becomes more difficult, as companies need to deal with near term maturities.

And as what we believe will be an economic slowdown continues to affect business models and business performance. So that’s kind of where we see the world.

Devin Ryan : Okay, great color, Thanks, Paul. And just a follow up here, I guess on just expense ratio. So, revenues are up 11%, year-to-date, comp expenses up about 20% year-to-date. I know, it’s not quite the scientific, but I don’t know if it’s possible just to break down on comp specifically, just how much of that growth is a function of just amortization from prior year versus, all the recruiting and, the most consequential year of hiring that’s going to be this year, versus just how much is just inflation and competitive dynamics, trying to think about that relationship? Thanks.

Helen Meates : Sure. I think there’s a number of — there are a number of components to the current ratio debt, and, as you mentioned. But we’re sort of begin with what our outlook is for revenues. And one significant factor is the senior level hiring that we’re doing that we’ve talked about, so that will obviously impact it. We also think about comp discipline around the existing population, the competitive backdrop. And then, as you mentioned, there is amortization from prior year’s comfort that we’ll be flowing through, as well. So all those factors are taken into account, when we determine what our best estimate for the ratio is.

Paul Taubman: I think Devin, if you just look back over the last three years, we have a demonstrably stronger firm today than what we presented three years ago. We have meaningfully grown the headcount for operating in market environments for two of our three businesses that are extraordinarily subdued, relative to three years ago. So when you step back, and you look at the significant investment, the strengthening of the franchise, and the very significant reduction in available wallet, in two of our three businesses, it’s not a surprise that the comp ratio has moved higher.

Devin Ryan : Yeah, understood. Okay, I will leave it there. Thanks very much.

Paul Taubman: Thank you, Devin. Thanks.

Operator: Thank you. Our next question will come from James Yaro with Goldman Sachs. Please go ahead.