Good morning, and welcome to the Piper Sandler Companies Conference Call to discuss the Financial Results for the Second Quarter of 2020. [Operator Instructions] The company has asked that I remind you that the statements on this call that are not historical or current facts including statements about beliefs and expectations, are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on the file with the SEC, which are available on the company's website at www.pipersandler.com and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to and are not substitute for measures of financial performance prepared in accordance with GAAP. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the Investor Relations page of the company's website or at the SEC website. Also as a reminder, this call is being recorded. And now, I'd like to turn the call over to Mr. Chad Abraham. Mr. Abraham you may begin your call.

Good morning, everyone. Deb Schoneman our President; and Tim Carter our CFO and I would like to thank you for joining our second quarter 2020 call. We will go through our prepared remarks and then open up the call for questions. I would like to start by thanking all of my employee partners. I continue to be impressed by your hard work, perseverance and determination during these challenging times. Your continued display of partnership with one another and dedication to our clients is remarkable. The vast majority of our workforce continues to work remotely using technology and ingenuity to provide access to the financial markets and innovative solutions to our clients. The resiliency of our employees and technology and unfettered dedication to delivering outstanding client service is driving financial results, benefiting our brand and driving shareholder value. Before I discuss the performance of the business, I would like to address our commitment to diversity and inclusion. A core tenet of our guiding principles is to attract, retain and develop a diverse group of the best people in a high-quality inclusive environment. Piper Sandler is unequivocally committed to the principles of integrity, respect, diversity, inclusiveness and service to our communities. We know that what we do next is more important than what we say now. We have begun a number of initiatives to accelerate our goals of diversity and inclusion and we are demonstrating our commitment to rebuilding our communities by seeding a special disaster relief fund dedicated to local efforts where we live and work. Next, I'll provide some overall comments on our financial results before turning to our corporate investment banking businesses. After historic volatility in Q1, equity markets rebounded and fixed income markets stabilized aided by record federal monetary and fiscal support. During the second quarter, we produced…

Thanks Chad. Let me begin with an update on our equity brokerage business. We generated revenues of $41 million for the second quarter of 2020, as equity market volumes and volatility remained elevated from historical levels, which drove solid performance in the quarter although up 15% from our strong first quarter revenues. Clients continue to seek out trusted relationships to find liquidity during these volatile market conditions and our reputation for premier trade execution drove our results for the quarter and first half of 2020. Year-to-date, we traded 6.6 billion shares, up 73% from the volumes traded in the second half of 2019. The breadth of our client base allows us to cross a significant portion of our cash trades resulting in minimal market impact, which is a significant differentiator for us. Equity brokerage revenues for the first half of 2020 were $88 million exceeding the full year 2019 results, demonstrating the success in integrating Weeden onto our platform and the trust placed in us by our clients. We expect our equity brokerage revenues to decline in the third quarter, as we have seen volatility and volumes decline in July and the market typically experiences a summer slowdown. As we look ahead, we are excited about our prospects and believe we are in the early stages of demonstrating the full capabilities of our larger platform across the breadth of our account base. The combination of top ranked research, trading and capital markets capabilities creates a premier client destination. And indications are that market share and voting ranks with clients have meaningfully improved. Let me turn to fixed income services. The Federal Reserve injected massive liquidity into the market toward the end of March, which helped stabilize markets in the second quarter. We generated revenues of $49 million in the second…

Thanks Deb. As a reminder, my comments will be focused on our adjusted non-GAAP financial results. We generated revenues of $293 million for the second quarter of 2020, up 19% sequentially and 80% year-over-year. The sequential increase was driven by record corporate financing activity and robust performance in municipal financing. Our brokerage businesses continue to remain strong while as expected revenues from advisory services moderated during the quarter. For the first half of 2020, revenues totaled $538 million, up 56% compared to the prior year, reflecting the investments we have made in the business through our acquisitions of Sandler and Weeden. The diversity of our combined platform has positioned us to serve our clients in multiple ways and generate solid results for our shareholders. Turning to operating expenses. Our compensation ratio for the second quarter of 2020 was 63.5%, down 130 basis points from the sequential quarter. Although our comp ratio is largely variable to revenues, we continue to manage compensation levels while considering investments, employee retention and business outlook. Non-compensation expenses for the second quarter of 2020 excluding reimbursed deal expenses were $44 million, down $8 million on a sequential basis due to the significant decline in travel and entertainment, as well as lower trade execution and clearing expenses. Non-comp expenses for the first half of 2020 excluding deal expenses were $96 million. As we continue to actively manage non-compensation expenses and travel and entertainment is limited, we expect costs to remain at these levels in the near-term. For the quarter, we generated an operating margin of 17.7%, demonstrating the scale and operating leverage in our business at higher revenue levels. Operating margin for the first half of 2020 was 15%, an increase of 110 basis points over the first half of 2019. This increase was driven by the…

Thanks Tim. I am encouraged by our first half results and our ability to serve clients in multiple ways through our broad product offerings. As we look ahead, July was another very strong month for corporate financing but we also expect the near-term environment will continue to be challenging for M&A activity. Our intense focus on serving our clients, supporting our employees and our broader communities just as we have done over the course of our 125-year history will help us navigate through this uncertainty. We believe the strength and durability of our platform positions us for success over the long-term. Thanks and we can now open up the call for questions.

[Operator Instructions] Your first question is from the line of Devin Ryan with JMP.

Great. Good morning, everyone.

Good morning.

Good morning.

So maybe to start with some of the M&A commentary and appreciate the detailed outlook. To the extent, we do see kind of a continued recovery here and economies do reopen I know that, there's a lot of ifs there, but to the extent that does play out and the deals come to market as Chad you mentioned in the remarks, is kind of the best case that the fourth quarter deals are announced and potentially are completed so fourth quarter could start to get back to something more reasonable after a slower third quarter? Or is that just wishful thinking and kind of really pushing into 2021 just because it takes time to actually execute on the transactions and get to a fee event? I'm just trying to think about, if we were to – I know there's a lot of scenarios here but if we were to play through the scenario of kind of a continued maybe slow reopening, what that could imply for the M&A market?

Yeah. Thanks Devin. Certainly, the last four or five weeks, we've seen more transactions start more positive conversations. What I would say obviously we benefited in Q2, we still had the tail of some closings of transactions, particularly financial services that have longer time to close. And so some deals that were announced at the end of the year and beginning of the year, obviously closed in Q2. So as we said, we do continue to think advisory revenues will be down in Q3. I do think we'll get – we'll start to get some of these new transactions we've started in Q4, but our expectation is that both Q3 and Q4 will still be fairly tough for advisory. While we're starting some transactions in every industry group, it's going to take a while for it to be at a full clip.

Okay. Understood. Thanks. And maybe one on the – just the overall public finance kind of underwriting and trading. It was active in the period and Deb you gave some detail around the themes there. If you could just to think about the fixed income business as well kind of heading into the back half of the year, volatility in the market has subsided a bit and yet activity has remained pretty healthy and demand seems to be good. So I guess I just want to dig in a little bit more around, what else is helping and just if there's any way to kind of calibrate it feels like maybe that business remains more elevated than it was heading into the pandemic, but maybe not quite as strong as the same quarter. So if there's any way to kind of frame that a little bit more as well that would be helpful.

Yeah. I think you characterized it pretty well there Devin, in terms of what we're seeing. And we do continue to see really strong activity from clients. And while volatility is down there's still a lot of uncertainty in the marketplace. And so as we have continued to shift from more of a call it a product delivery to delivery of advice and strategy, bringing together the Sandler O'Neill component into our platform, we're seeing again more of a focus on this advisory for clients, we mentioned public entity clients, there's others who are really seeking advice. And that seems to be driving continued activity, and a continued change in repositioning of portfolios. The other thing, I would say is, we are benefiting from the breadth of this larger sales force and the ability to find product and liquidity for clients, with the combination of Sandler and Piper. So that's also, I think helpful in terms of driving continued revenues.

Okay. Terrific. Maybe just a last one here for Tim just on the non-compensation. I appreciate the commentary around the expectations to the extent we remain, primarily in a remote work environment that expenses could remain in a similar ZIP code here. But as we look out, obviously I think every company has had to evaluate their expense structure just with the view whether it be a few months ago there is to be a very difficult revenue backdrop and things have I think evolved in a better tone. But as you're thinking about the expense structure and also just how efficient the firm has been in this virtual environment, are there things that you're looking at or feel like could be opportunities over time just as whether it'd be real estate footprint or ability to do certain things virtually that historically you weren't doing? I'm just curious, if there's any kind of structural thoughts around expenses that could be a benefit coming out of this very difficult period?

Yeah, Devin. I think there are a lot of those types of things that you think about particularly on space and real estate, I think we were sort of moving down a path of obviously integrating and consolidating some space already, particularly in New York with the previous Piper space and Sandler space. Outside of that, obviously, there's locations where we've got longer-term leases. I think over time we will continue to evaluate that. And I do think the current environment and how people have performed remotely gives you some confidence that you could make some different decisions, but I think that all happened probably over a longer-term period than anything that happens sort of here in the near term.

Yeah. And Devin maybe – it's Chad. I'll just add three sort of examples that I think will probably have some structural change. An IPO used to be a two-week full process fly to tons of different cities. And now we're doing the road shows in a quicker fashion in a virtual way. I imagine there will still be in-person appointments in New York and Boston but the sort of full two weeks super expensive long road show, I can't see that. Our research analysts used to spend a ton of time on the road with investors. And while I think some of that will come back, we've certainly heard from investors that a lot of the virtual events and things we're doing are working well. And the last -- we spent a ton of money on conferences and in-person events. And again while I think some of that will come back not all of it will. And so I do think there's going to be some pretty big structural opportunities there.

Okay. Great. Actually if I can sneak one more in here. Just looking at some of the revenue trends already in the third quarter. So, we look at obviously the investment banking data that's out there. And it looks like equity capital markets has started on a very strong note and obviously had a very good second quarter. I'm curious just in terms of thematically the backlog trends that you're very strong in health care and there's a lot of activity there and you noted kind of overall market share gains does it feel like there's just activity getting pulled forward the window is open ahead of the election, which could create some market volatility definitely uncertainty, what's driving that and just kind of the tone as you think about kind of the back half of the year just given what we're seeing is very, very strong July at least from the outside?

Yes. No, obviously, just -- we're in a spectacular time for health care investing. You've seen just record dollars inflows. I would say the funds have made a lot of money. There's tremendous investor interest. So, Q2 was great. And like we said July has started incredibly strong. I would agree with the election coming up there are companies because the market is so strong just taking advantage of capital raising now. I do expect that to slow by the time we get to Q4. But there's just a lot of really good companies. And frankly there's been a lot of really successful IPOs. So, many of those companies will look to follow-ons as well. So we're very encouraged by what we're seeing in the health care market. We recognize it's obviously a good market but we've also gained some share. This is business we've been in for a long time, but we've really continued to invest the last three years and we think we're seeing the benefits of that.

Okay, terrific. Well, I think that speaks well to the diversification of having a number of revenue streams.

Thanks Devin.

Thanks Devin.

Your next question is from the line of Michael Brown with KBW.

Thank you, operator. Hey good morning everyone.

Good morning.

So, yes, I just wanted to kind of parse through some of your comments and just make sure I've kind of got the outlook kind of summarized here. So, it sounds like advisory is expected to be able to -- and that certainly echoes what we're hearing from really all of your peers. Brokerage sounds like it'll be a little bit softer as well not all that surprising given the volatility volumes that we've seen. Public finance is still pretty good but it's going to be probably lower in the second quarter and then ECM continues to be very strong. So, against that backdrop obviously you've got a tough kind of comp sequentially given the strength in the second quarter. How do we think about how the comp ratio could play out next quarter for the back half of the year?

Yes, Mike, I guess, as we think about that we've through the first half really tried to think about what the outlook is consider retention we've done some things to invest in the business. And my view is that we were higher in the first quarter. We've seen it come down to 63.5% in Q2 and that we're likely in sort of that same range 62% to 63%, I would think for the second half. So, that's still a little elevated from what we've talked about in the past but that does take into account sort of what we've done in the first half and how we think about business outlook in the second half.

Yes. And Mike, I guess, the one thing I would add is one of the challenges is we just don't have as much long-term visibility in all of the financing businesses both our debt and preferred business for financials, our healthcare ECM business, our public finance business. Obviously, they're all very, very strong now and continued to be strong in July. It's just -- we don't have three, four, five months' visibility. Those transactions come together. And so clearly if the financing market stays strong, we could make up all of the M&A shortfall, but we just don't have that -- we don't have that visibility.

Okay, great. That's fair. I'd like to just follow-up on the -- this quarter. So, could you just expand on the Board's decision to do essentially kind of reverse course following the cut last quarter and then to kind of bring it back, obviously, not back to where it was prior to the reduction but what kind of drove that change? Why not just given -- as you just talked -- environment certainly is pretty uncertain as we look forward why not just kind of keep it at the $0.20 level and do like a special true-up at that? Thanks.

Yes, I think Mike we mentioned on our last call we're very committed to sort of the range we've had of returning 30% to 50%. We said this year we'd be towards the bottom end of that 30%. And so, yes, we do anticipate having our special. And I think just versus having a much bigger special or giving more of it back in the quarter our preference has always been to give more back in the quarter. So, we're just trying to find the very conservative balance and frankly, that was pretty easy to do. And so we just raised the quarterly dividend and we do think we'll have the special at the end of the year as well.

Got it. Okay. And if I could just follow up one more on that on kind of the capital allocation. So in April you closed on the Valence transaction and now the Sandler acquisition has been integrated. Have you seen any opportunities out there that are kind of peaking your interest on the acquisition side? Are there kind of boutiques that you could continue to look to acquire? And if that's the case, I guess where would you be looking to grow on the margin?

Yes. So I think we – I think we've proven we can integrate really good specialty expertise. We've had a lot of success with that. So I think we do intend to continue. And I do think this environment creates opportunities. I mean there are certainly folks that are only focused on advisory in certain sectors, in certain geographies, in certain products, where it's going to be a tough six to nine month row but that doesn't mean it's not a good advisory sector. So we are seeing a pickup in the obvious areas for us which have been consistent. Relative to products we're underrepresented in certain parts of restructuring. So that makes a lot of sense. We've talked about continued expansion in Europe where we're still underrepresented. We've talked about relative to our size still being underrepresented in the tech market. So there's lots of places we continue to look and I am encouraged by recent conversations.

Great. Appreciate it. Thanks.

Thank you. [Operator Instructions] Your next question is from the line of Mike Grondahl with Northland.

Yes. Thanks, guys and congratulations on the quarter. A bunch of my questions have been asked and answered. But maybe Chad, is there any update or development to kind of the call out in the other verticals, industrial, consumer tech energy anything you want to share there?

Yes. Yes. So I think that obviously in Q2, the vast majority of the strength came from financial services by far led the way with the advisory business and sort of the debt and preferred issuance. Health care was incredibly strong in ECM, which we talked about. Most of our other segments are heavily advisory focused and in industrials in particular and even consumer. Those are businesses where there's a lot of private equity, sell-side transactions and across all our verticals even health care all of that stuff has slowed. So they don't have as much diversified product mix. So it's certainly way softer than the other segments. And then you talked about energy. We are seeing – there's obviously tons going on in the energy sector. A lot of recapitalizations, a lot of restructuring, a lot of rescue financings. And so we are adding lots of mandates to the backlog there. It's a difficult market. It'll depend on how many of those transactions we can get done but we are starting to see some green shoots of opportunities in certain types of transactions in energy.

Got it. Great. And then just lastly, you talked about an advisory, there's good discussions going on and you think you're going to get some mandates but it's a little bit macro-dependent. Do you think – is there anything you can point to? Is it just a little bit more stabilization in the next month or two? Or what do you think triggers those?

Yes. So like I said I mean, new conversations and our sort of processes April, May, it really ground to a halt. So we started some stuff in June. We started more stuff in July but that's still on a relative basis. That's not broadly across every subsector. And so I think you just – you need continued confidence for the strategics. You need continued CEO confidence for the private equity firms. You need some continued improvement in the debt markets. A lot – for a lot of the private equity sales that are leveraged we're certainly seeing interest from the debt markets and demand from the debt markets. Terms aren't certainly the same as they were pre-COVID but they're improving getting better and more and more private equity firms are starting to do deals. So I think it's just going to take time. I mean there's certainly going to be pent-up demand from all the pause in activity. I just don't think it's going to snap back like people think it's just going to be a gradual pick-up here as we get into Q3, Q4, Q1.

Got it. That's helpful and congratulations again. Thanks, guys.

Thank you.

Thanks, Mike

There are no further questions. I will turn the call back over to Mr. Abraham.

Okay. Thanks, everyone. We look forward to updating you again next quarter. Have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.