PJT Partners Inc. (PJT) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the PGP Partners full year and fourth quarter 2016 earnings call. My name is Mark and I’ll be your operator for today. At this time, all participants are in a 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, ma’am.

Thanks very much, Mark, and good morning, everyone. And welcome to the PJT Partners full year and fourth quarter 2016 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 statements. We believe that these factors are described in the risk factors section contained in our 2015 Form 10-K as well as subsequent filings we make with the SEC, which are 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 reconciliation, you should refer to the financial data contained within the press release we issued this morning, which is also available on our website. And with that, I'll turn the call over to Paul, with just a caveat ahead of time for his voice. He’s been quite sick.

Thank you, Sharon. Good morning, everybody. As we completed our first full calendar year as an independent public company, the true earnings power of our firm came into sharper focus. At the outset, we committed to do the following – to unlock the full potential of our three businesses through the separation from Blackstone, to build upon our leading market positions and restructurings in Park Hill, to create the premier strategic advisory business by attracting truly differentiated, best-in-class talent to our platform, to integrate and leverage the power of these three complementary businesses to better serve clients. Our progress against these goals certainly exceeded our expectations across every dimension and it is reflected in our full-year financial performance with our 2016 revenues up 23%, including a 32% increase in advisory revenues relative to 2015. Starting with Park Hill. While 2016 was obviously a trying year for Park Hill, we weathered the storm better than could have been expected. Our secondary advisory business experienced a revenue decline of approximately $4 million versus year-ago levels, but most importantly we are optimistic about our prospects for 2017. Our secondary advisory business is benefiting from the very close collaboration with strategic advisory to identify and prosecute key opportunities identified on the corporate side. In addition, we have every expectation that the investments we made in our secondary advisory business in 2016 will bear fruit in 2017. We added a partner to the business in the US and we promoted a new partner to lead our secondary advisory efforts in Europe. The opportunities for Park Hill to collaborate with the other two businesses continue to present themselves. As an example, our Park Hill real estate verticals actively engaged with our bankers in both strategic advisory and restructuring on several important transactions. In restructuring, our leading restructuring business had a standout year in both relative and absolute terms and further solidified its leading position in the market. Our team was early in recognizing the credit ramifications of the downward pressure on oil prices and capitalized on the market opportunity. Our global restructuring business was recognized as the market leader by several leading industry organizations. We were named the Global Restructuring Advisor of the Year by IFR and our work on several marquee transactions was also recognized. Where we sit today, the macro backdrop for restructuring appears relatively muted, with low default rates and strong financing markets. Nevertheless, our restructuring team continues to see active deal flow across regions and increasing activity in particular sectors, such as retail, merchant power, healthcare and TMT. Our business is also balanced across debtors and creditors, as well as geographies. While our standout results in 2016 make us appropriately cautious for 2017 prospects, we are encouraged by the fact that we enter 2017 with a backlog that is as strong as a year ago. Turning to strategic advisory. I am often asked to quantify the progress we're seeing in our strategic advisory business. There is no doubt that the separation from Blackstone has enabled us to transform the advisory business and move us closer to our goal of being recognized as the premier advisory firm. When we compare 2014, which was the last full year with the business operating under Blackstone, to 2016, our first full year as an independent advisory business, the progress is dramatic. We doubled the number of announced transactions, doubled the average deal size, and quadrupled the announced dollar value, all with a team of comparable size and in similar market conditions. We continue to see tremendous opportunities to grow our strategic advisory footprint and are well-positioned for significant market share gains in 2017. Over the course of 2016, we increased our roster of strategic advisory professionals by almost 50% and we are encouraged by our strong pipeline of candidates to continue our growth in 2017 and beyond. Looking forward, we continue to see strong momentum in the business as measured by client engagements, the quality of our assignments, and the strength of our backlog. We entered 2017 with a revenue backlog of announced pending-close transactions that was meaningfully higher than a year ago and a shadow pipeline of active man days significantly higher than a year ago. So, all in all, across our three businesses, we are very pleased with how we are positioned to start the year. I will now turn it over to Helen to review our financials.

Thank you, Paul. Good morning. So, getting with revenues, our total revenue for the year were $499 million, up 23% over 2015. The breakdown of revenues, advisory revenues, $378 million, up 32% year-over-year. The increase reflects a slight increase in strategic advisory fees and a substantial increase in restructuring activity with an increase in both the number and size of transaction fees. Placement revenues were $115 million, roughly flat year-over-year, with the number of closing and average fees relatively consistent compared with 2015. For the fourth quarter, total revenues were $173 million, up 67$ versus the fourth quarter 2015. A breakdown of revenues in the quarter, advisory revenue were $136 million, up 111% year-over-year. The drivers of the increase were substantial increases in both strategic advisory and restructuring fees compared with the same period last year. Placement revenues were $36 million, down slightly year-over-year. Turning to expenses, consistent with prior quarters, we’ve presented the expense with certain non-GAAP adjustments, which are more fully described in our 8-K. Now, first, adjusted compensation expense, full-year 2016 compensation expense was $315 million compared with $278 million in 2015. The year-over-year increase reflects our improved business performance as well as an increase in headcount. And in 2016, our headcount grew 19%, with professional headcount growing approximately 22%. Our compensation expense, as a percentage of revenues, was 63.1% for the full-year 2016, down from 68.6% in 2015. Our full-year compensation expense ratio ended up slightly lower than we had been forecasting due to higher-than-expected revenues for the year. Fourth quarter results, compensation expense was $107 million compared with $93 million for the same period last year; and as a percentage of revenues, 62% in the fourth quarter 2016 compared with 90% in the same period last year. Turning to adjusted non-compensation expense, total non-compensation expense was $91 million for the full-year 2016 and $23 million in the fourth quarter. And as a percentage of revenues, 18.2% for the full year and 13.3% in the fourth quarter. We previously mentioned that year-over-year comparisons are less meaningful, given the composition of our pre and post-spin expenses, but we now have a full calendar year of standalone results that we can track against. We continue to actively manage our expenses; and going forward, we expect to benefit from the operating leverage in our cost base. Turning to adjusted pretax income, we reported pretax income of $93 million for the full year and $43 million in the fourth quarter. Our adjusted pretax margin was 18.7% for the full year and 24.7% in the fourth quarter. Our provision for taxes, as with prior quarters, we’ve presented our results as if all partnership units had been converted to shares, so that all of our income was taxed at a corporate tax rate. With that adjustment, the effective tax rate was 38.3% for the full year and 38% for the fourth quarter. Our earnings per share, our adjusted if-converted, earnings per share was $1.55 for the full year and $0.70 in the fourth quarter. Turning to our share count, at the end of the earnings release, we’ve provided a summary of our share count. The weighted average number of shares was 37.2 million for the full year and 37.8 million for the fourth quarter. As we discussed on our last call, our 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 those exchanges in either cash or Class A shares. During the fourth quarter, we received exchange notices from holders representing approximately 362,000 partnership units. And as with the fifth exchange, we’ve chosen to settle this exchange in cash. Combining the first two exchanges, we would've repurchased over 950,000 partnership units. Going forward, there will be approximately 9.3 million remaining vested partnership units, which are held primarily by current and former Blackstone employees. And as we’ve mentioned previously, these units provide a potential repurchase opportunity without impacting our public float. On the balance sheet, we ended the year with $152 million in cash and cash equivalents, $159 million in net working capital and no funded debt. Finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on March 23 to Class A common shareholders of record on March 9. I’ll now turn back to Paul.

Thank you, Helen. We’re proud of all we’ve accomplished in our first full year as an independent publicly traded company. Key to our growth strategy is our ability to attract and retain best-in-class talent. We started 2015 with 34 client-facing partners, 2016 with 45, and 2017 with 50, and that number will grow to 52 with the addition of two new partners who will be joining our strategic advisory business in the near-term. We have every expectation that we will end 2017 with significantly more partners than we have today. Since our last earnings call, we have also added three senior advisers and a new board member announced earlier today. We are extremely pleased and honored to have James Costos join our firm's board. He brings a level of global and corporate expertise that will be invaluable to the strategic growth of our company over time. Looking back on all we've accomplished in 2016 and all the momentum we have in our business that stands to be realized in 2017 and beyond, we remain very confident in our near, intermediate and long-term growth prospects. And with, we’ll be happy to take your questions.

Mark, would you be able to check for questions?

[Operator Instructions]. Your first question comes from Mike Needham from Bank of America. Please proceed.

Hi. Good morning, everyone. So, just to start, I have a couple of questions on hiring and the outlook, I guess how difficult is the labor market right now? There’s a good M&A environment, making it hard for some people to leave their seats or is it not a factor for people?

I think there's a tremendous opportunity to attract talent because there's an awful lot of talent at large firms who see an opportunity to do something different, more entrepreneurial and comfortable place where what they do is the main event. And I don’t think that's likely to change anytime soon. And we continue to have a very significant number of high-quality conversations. We’re very confident, as I said, in our pipeline and in our ability to attract and to add to our footprint in the coming months.

Okay. All right, got it. And then, on placement fees, they were pretty good in 4Q. You talked about the secondaries business. Can you comment on what drove the strength just in the fourth quarter?

The strength in overall advisory?

Placement fees.

I think basically it was roughly flat year-over-year. So, in the fourth quarter, down slightly. So, I think we had a very similar number of transactions and similar fee sizes. So, I don’t think there was anything dramatic in the fourth quarter.

As you can imagine, Mike, there's some lumpiness to when we recognize revenues, and that's why earlier in the year where there had been some concerns about the numbers being down year-over-year, I was very clear you need to take a longer-term perspective. And when we think about our business, we don't really think about it in quarters. We think about it in years. We give our directional guidance in terms of years. And the fourth quarter really is just a catch up relative to earlier in the year.

Okay, fair enough. And then on just election impact and the level of activity, have you seen a change in the types of client discussions, have discussions increased after the election or not?

I think there’s a very, very good tenor to the market. I think that the number of conversations and the intensity and the seriousness of those dialogues is exceedingly high. I've said for some time that when you have a change in administration, it tends to have a freezing on actual action or activity as people waiting to see the new administration, see how key staff positions are filled, what their antitrust policies are likely to be, what their policy agenda is, the time to get it implemented, and that's a little bit of what we observe today, which is there is clearly a heightened sense of conversation and a desire to lean into situations. But I do get the sense that many companies are waiting for a bit more clarity on a number of key dimensions before they actually take the plunge. And I don’t think it’s frozen activity. I just think it probably has yet to be fully unleashed as positive business sentiment that is clearly percolating through the system.

Okay. Got it. And I guess just a follow-up to that, you mentioned antitrust. I guess, how has the regulatory environment been for doing very big deals and would you expect that to change over the next four years?

Well, just based on the news in the last 24 hours of another transaction being knocked out, it's clear that a number of very large transactions have been unable to get over the regulatory goal lines. And I think that that obviously creates uncertainty in the minds of others. And I don’t think there is a clear sense as to where the new administration is going, and I suspect that prudent executives in situations where they’re thinking about a horizontal consolidation that might raise some concerns would like to know more before they move forward as to know what are the potential remediation opportunities, confidence of success, risk to non-completion, and I suspect that over the next few months, as more and more of the staff positions are filled, there's a better sense as to the direction that they’re going to take in terms of antitrust types of transactions that are looking to facilitate those. But they may have concerns about that will begin to fill in the campus and people will be able to forward with more conviction. I think when you take that and you couple it what could be a very substantial redo of our tax system, I think those are two things that people are looking at and paying very close attention to right now. But what’s happened is, level of engagement, level of conversation, level of dialogue is all up appreciably.

Okay, got it. Thanks for taking the questions.

Sure, thank you.

Your next question comes from Steven Chubak from Nomura. Please proceed.

Good morning, everyone. This is actually Julian Craitar filling in for Steven.

Good morning. Hi, Julian.

Hi, everyone. So, first question, just on non-comps, so your adjusted non-comp ratio for the quarter, and correct me if I'm wrong, it seems like it was very strong, came in lower than your public peers. How should we be thinking about the ratio going forward as you build out your advisory business and start to see revenue strength in the other businesses?

Well, I think what we’ve said before is that we have a relatively fixed cost within our non-comps, approximately two-thirds is fixed and I think about one-third is in rent. So, we have always said that we have operating leverage in the cost base, and I think you see that in the fourth quarter when we had relatively high revenues. So, we think the aggregate amount of non-comp as a dollar amount will grow less than our revenues.

Okay. And just a follow-up on your outlook on restructuring and M&A. How should we be thinking about the mix shift between restructuring and M&A fees because it seems like from your comments that restructuring activity could be more muted this year, while your M&A business could be poised to fair much better given the much stronger backlog that you cited.

Look, I think that’s fair. Our single biggest growth engine is our strategic advisory business and we are very pleased with our ability to navigate 2016 with the pivot from all of the folks who were on-boarded a relatively short while ago. And as a result, there’s been very low seasoning of that group and our ability to create the financial results we did in 2016, recognizing that we had very few of our partners who had been in their seats for very long, I think, was highly encouraging. When we look at early signs of traction, it’s client engagement, it’s mandates, it’s our win ratio when we compete against other firms for a mandate, and on all of those we are getting very considerable degree of traction. And we feel very, very confident about our ability to continue to grow our advisory market share and to grow our advisory footprint. And both of those are going to occur almost regardless of the macro environment for M&A. And what we’ve consistently said is that we are a market share, not a market size story in M&A, meaning our fortunes are much more closely tied to our ability to grow our market share and we have a great deal of confidence in our ability to do that. In restructuring, I would make the point that we’re starting to see some of the benefits of the unshackling from Blackstone. And at some point, you can't really deconstruct any individual assignment and try and ask what would've happened in a different world. But the fact is that every day that the restructuring team has a larger and larger group of supremely talented and experienced and seasoned senior bankers who were the front end for them, who are getting them into situations far earlier than they might otherwise that you now have that front-end salesforce. The fact that you no longer have particular conflicts with your investing business, the fact that you now are much more easily embraced by private equity sponsors who view us as a very hospitable place to do business where it may have been viewed as a competitor before, I think that also suggests that with the best-in-class restructuring team that we have, their ability to increase their relative position, I think, is in evidence here.

Okay. And, actually, I just wanted to follow-up on your comments about, how you believe that you guys will continue to capture market share and that PJT is a market share story. I was just wondering if you could provide some more color on like which sectors do you see the most opportunity in, expect to see the strongest activity over the coming months or sectors that you believe that you can really build out your brand and capture market share?

We’re doing this block by block, bit by bit and we’re very conscious to make sure that we don't bite off more than we can chew and that's why we slowed down some of the hiring at the partner level last year because what we found was we had so much activity and work that we needed to get the balance right between our non-partners and our partners, so that we actually could continue to support our clients in the most appropriate way, and that's why when I make reference to our increase in headcount, we increased our number of professionals in advisory by close to 50% last year. So, we’re very much of the belief that all of our partners, who come to us from very different backgrounds, we made a major push into Europe, but it's a focused push, which is we only have two offices in all of Europe. We have an office in London. We have an office in Madrid. As a result of our relationships in Madrid, that gave me an opportunity to visit with James Costos who was then the ambassador for the United States to Kingdom of Spain and we developed a relationship and we were able to invite him to join our board. And James will bring a very keen appreciation of the business environment in Europe and also with someone who has worked with many companies in the US, trying to do business in Europe. So, everything we do sort of has a bit of a two-or-three-steps-ahead focus to it. And what I would say is, we have made recent hires in the real estate space. We have made recent hires in the industrial space. We have made recent hires in Europe. We have made recent hires in capital markets advisory. We have a whole host of existing areas of strength in our firm, including power and utilities, TMT and the like. But we think we’re just in the early stages in filling out our team and in creating a firm that can every year compete for more and more of available share of opportunities.

Okay. Thank you for the color. And just my last question, I know that you mentioned how you typically expect to see a slowdown in activity. Just once a new administration comes into the White House, I was just curious, have you been surprised by the level of announcements so far given the elevated uncertainty that you cited?

It’s interesting. It’s been all of, I think, five or six weeks into the new year. And if you look at it year-over-year, it’s up significantly. But last year was relatively slow start to the year. And if you simply take, I think, the first five or six weeks of the year and you just annualize that, it's actually down versus a year ago. So, it’s a little bit of a Rorschach testing. You can get any sort of answer you want. I don't think M&A activity comes to a grinding halt because there’s a lot combinations, rationalizations, divestitures, acquisitions that need to occur and that they really are dependent on where the final tax regime is going to end up or they’re not particularly concerned about antitrust policies. So, I don’t want to suggest that everyone is keenly sensitized to the new administration. I just think that everything is on the margins and there clearly are a class of would-be acquirers who are influenced by that. And I think for that class, my sense is you are likely to see far more activity after some of this was clarified as opposed to before.

Thank you, guys.

Thank you.

Our last question comes from the line of Devin Ryan - JMP Securities.

Thank you. Good morning. Paul, Helen, how are you guys?

Good morning.

I wish I could say I’m doing well, Devin, but…

I know. I'll keep my questions brief here. It's been a long call for you. But, obviously, congratulations on a nice end to the year, your first full year as a public company. Just a couple of quick ones. When you have a couple of big recruiting years as you have, you're kind of in this accelerated growth phase, it's a little bit difficult for us on the outside to see who exactly is driving those revenues within the firm. But I'm assuming that many of the bankers that you've added over the past 12 to 18 months really aren't hitting their stride yet. So, I guess, first, is that a fair assumption? And then really what I'm trying to do is just get a sense around the level of built-in capacity here and maybe revenue potential just tied to those recent hires as they start to contribute in a more normal way. I am not sure if there's a way that you guys look at that or can frame it. Just trying to think about that from the outside.

I think about it pretty, which is there's the moment when we, as managers, know we have the right people on our team and then there's the moment when you all, as investors and those who cover the company, see it hit the bottom line. And I see it much earlier, obviously, because there are a lot of confidential mandates where we have been able to break through and add to our roster of clients. So, when I look at my own little known list as to whether or not we have the right people and whether or not they’re getting the job done, so to speak, is who are the clients who are doing business with us and what is our ability to break through the clutter and be chosen as the trusted advisors to a company, how many new client relationships do we develop. And as you can imagine, that takes time. And lots of times, when someone is retained, it doesn't immediately lead to an announcement press release and a closing. It's a multiyear process. And all of that was factored into our strategy in moving forward. What we said when we started this enterprise was that we knew that the unshackling from Blackstone and the ability to free ourselves of all of those conflicts and to add all of these people and to now run these businesses in a much more integrated way that that was going to really turbocharge our growth in the early years and that we could then make the investments in the strategic advisory business, and not rush it, and to do the right things and really focus on 2017, 2018, 2019 and beyond. Then, I think in that sense, it's very much the case that we – we’re very confident that we have the right folks. Also, part of the method to our madness is the more that people see that those who come to our firm are flourishing that they’re winning off of this platform, that they're incredibly happy on this platform, that they like the team approach that our firm provides, that makes it easier and easier and easier to recruit. And from our perspective, we see the recruiting becoming easier with the passage of time, and that's why we’ve been quite relaxed about making sure that when it's right for someone that's the moment that we strike. And I think, also, unlike a lot of other firms, those that we are attracting to our platform, their fundamental decision is to stay where they are at a big firm where they’re incredibly well-regarded and very much in the flow or they’re prepared to make a change. And what they all tell us is, if they’re going to make a change, this is the platform they want to change to, and that just takes some time. But I’m quite confident that you will see over the course of the year a number of additional senior additions to our advisory business. And I'm also confident that, as those who have come to our firm over the last year or so season on this platform, the progress that we see directly will become much more apparent in announced transactions, closings, and revenue recognition.

Okay, terrific. Appreciate all that color. And looking at Park Hill, I know there are some sub-businesses within that, so it's probably not just one theme. But when you look at equity market at its highs, how does that impact the outlook for that business, meaning is that kind of the best case or are they actually in certain pockets kind of rooting for some dislocation?

Well, look, it certainly has some clear dislocations in the alternative space, in the hedge fund world. So, that's actually happened. What I had said on an earlier call, which is clearly the case is, in a choppier fundraising environment and in a world where a number of very high quality fund managers have seen a decline in AUM, their willingness to reach out to a Park Hill to help them tap into a new investor base or to increase their AUM, they’re much more receptive to that in a challenging environment. So, it's like many things in the business worlds. What you first see isn't really what ends up happening. The more challenged environment, while that does make it harder to raise funds, it also means that some companies that otherwise who would have been comfortable doing on their own are now prepared to spend time with Park Hill. We’re spending a lot of time on the credit side and there's a lot of demand for credit products. So, we’re spending a lot of our efforts at Park Hill in that regard. And I would say also that, when you think about the private equity world, whether or not asset values are at highs, those are long term investment allocation decisions that are being made and they tend to be reasonably divorced from near-term market sentiment when they think about how much they’re prepared to commit to the private equity world. So, in many respects, I think we’re somewhat disconnected from the ups and downs of the market on a daily basis, but trying to figure out where there are new pockets of opportunity. And in the secondary space, as an example, there may well be opportunities for a lot of capital relief for a lot of insurance companies and others who have big PE portfolios and perhaps our cross-fertilization discussions amongst our bankers and the Park Hill professionals together can unlock some of that for the benefit of our clients. So, different stories depending upon the vertical value.

Yeah. Okay, terrific. Thanks for taking my questions and feel better.

Thank you very much.

Appreciate it. Everyone, we’ll speak to you on our next earnings call. Thank you.

Bye-bye.

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation and you may now disconnect. Have a wonderful day.