PJT Partners Inc. (PJT) Q1 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen. And welcome to the PJT Partners' First Quarter 2017 Earnings Call. My name is Mark and I will 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.

Thank you very much Mark and good morning and welcome to the PJT Partners' first quarter 2017 earnings conference call. Joining me today is Paul Taubman our Chairman and Chief Executive Officer and Helen Meats, 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 Factor section contained in the PJT Partners' 2016 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 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 will turn the call over to Paul.

Thank you, Sharon and good morning everybody. Thanks for joining us today. I'm pleased to report on our continuing progress at PJT. We remain focused on expanding our strategic advisory foot print while enhancing our leadership positions in restructuring in Park Hill. The power of these three businesses are working together combined with the addition of best-in-class talent we are attracting positions us to significantly increase our market shares. In the first quarter of 2017 our advisory revenues grew 22% while overall firm revenues increased 5%. Strategic advisory and restructuring both performed well versus year ago results. The early returns in our strategic advisory build out continue to be encouraging, as measured by client engagement, active mandates and announced transactions 2017 is off to a fast start relative to a year ago. Our restructuring business had another strong quarter and maintained its leading position. Park Hill was down considerably for the quarter principally due to an absence of significant closing in the quarter. This business is quite consistent as measured in years, but inherently variable from quarter-to-quarter, given our pipeline of engagements we remain constructive on the Park Hill business for 2017 and beyond. Turing to each of our business in a bit more detail. In Park Hill, real estate private equity and secondary saw an absence of significant closings in the quarter; however, our full-year outlook for these business including hedge funds remain strong. The demand for private equity products is robust and we have a number of high quality fund raisings well underway. In real estate we intend to benefit from investors increasing interest in participating in direct investments. Park Hill was seeking to capitalize on this opportunity. A partner and a managing director recently joined the team to focus on real estate asset level transactions. We see significant opportunities in the secondary advisory business as it relates to securitizations and GP led transactions. The expertise within our strategic advisory business should continue to aid these securitization efforts. Turning to restructuring, our strong results from 2016 continue to 2017, we benefited from significant closings in the quarter particularly in the energy sector. While we continue to be appropriately cautious on the near term macro outlook for restructuring, our backlog increased during the quarter as we added a number of significant high profile mandates across a variety of sectors. The pace of industry wide activity has slowed from the high levels of 2016, but our level of new deal activity remains robust. We are certainly seeing the results of the closer collaboration between our restructuring and strategic advisory bankers and now have more joint mandates than ever before. While energy activity is clearly less frenzied, we are seeing some pickup in activity around the globe in sectors such as power, retail, healthcare, TMT and shipping. Turning to strategic advisory, we generated strong year-over-year growth in strategic advisory. We experienced a significant increase in both the number and dollar value of announced transactions in 2017 as compared to a year ago. These deals should create meaningful revenue uplift in the second half of the year versus the first half for strategic advisory. The level of client dialogs continues to accelerate we are competing for and winning an increasing number of significant assignments by presenting our clients with differentiated capabilities, success will no doubt follow. Our clients increasingly appreciate the depth and breadth of our advisory teams. We are committed to expanding our focus areas without compromising either our high standards for talent or our strong partnership culture. Recent partner additions deepen our expertise in industrials, real-estate, gaming and lodging as well as equity capital markets. We are already seeing a contribution of these hires and are confident in their ability to help expand our business. We are in advanced dialogs with the number of high impact senior bankers and expect to add several more partners this year. Every day that passes our brand grows the strength, our bankers gain more traction and we improve our competitive position. I will now turn it over to Helen to review our financials.

Thank you Paul, good morning. Beginning with revenues, total revenues for the quarter were $121 million up 5% compared with the first quarter of 2016 and the breakdown of revenues advisory revenues which includes strategic advisory, restructuring and the secondary advisory business in Park Hill were $99 million up 22% versus the same period last year. As Paul mentioned, the growth was driven by revenue increases in both strategic advisory and restructuring. Placement revenues of $20 million, down approximately 39% from the same period last year, while the number of fee paying clients was essentially unchanged year-over-year. The relative absence of significant closings in the placement business during the quarter was the principle driver of the year-over-year revenue decline. As was evidenced last year, there was a loss of quarterly variability in the placemen business and we remain constructive on the outlook for placement revenues for the full-year. Turning to expenses. Consistent with prior quarters, we have presented the expenses with certain non-GAAP adjustments, which are more fully described in our 8-K. First, adjusted compensation expense. First quarter 2017 compensation expense were $77 million or 64% of revenues compared with 63.1% in the first quarter of 2016. This ratio is consistent with the full-year of 2016 compensation ratio as adjusted for certain extraordinary items and represents all time best estimates for the compensation ratio for the full-year. Turning to adjusted non-compensation expense. We remain focused on controlling our non-compensation expenses, total adjusted non comp expense was $20.9 million for the first quarter of 2017 compared with $21.6 million in the same period last year, and as a percentage of revenues, 17.3% for the first quarter of 2017 compared with 18.7% in the first quarter last year. Turning to adjusted pretax income, we reported adjusted pretax income of $22.6 million for the first quarter and our adjusted pretax margin was 18.7% compared with 18.1% in the first quarter 2016. On the provision for taxes, as with prior quarters, we have presented our results as if all partnership units had been converted to shares, so that assumes all of our income was taxed at a corporate tax rate. Our tax rate also takes into account the tax benefit related to the delivery of wasted shares in the quarter at the value higher than amortized cost. Taking into account this benefit, our current estimate of the effective tax rate for the full-year is 36.4% and this is rate we applied in this quarter. Excluding the tax benefit the effective tax rate would have been 39.2%. On earnings per share, our adjusted if-converted, earnings was $0.38 per share in the first quarter compared with $0.35 in the first quarter of last year. The first quarter impact from the reduction and tax expense was $0.02 per share. The adjusted if-converted earnings where therefore have been $0.36 per share without those tax benefits. On the share count for the quarter, our weighted share count was 37.8 million shares and as we have discussed on prior calls, 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 first quarter 2017, we received exchange notices from holders representing approximately 527,000 partnership units and we've elected to settle this exchange in cash. We continue to view these exchanges as an opportunity for us to minimize solution without impacting our public flows. With this latest exchange for cash, we will have repurchased approximately 1.5 million partnership units since last spin. On the balance sheet, we ended the quarter with $98 million in cash and cash equivalents and short-term investments, $187 million in net working capital and no funded debt. And finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on June 22 to Class A common shareholders of record on June 8th. And now back to Paul.

Thank you, Helen. As we have said from the outset, we remain focused our clients, our employees and our shareholders. We will continue to serve our clients by attracting best-in-class talent, continue to appropriately reward our employees and continue to serve as diligence stewards for our shareholders. In terms of capital management as Helen mentioned, we've committed to repurchase an additional 527,000 holdings unit, which by itself will offset a portion of previous employee grants. Including this repurchase, our fully diluted share count well has incrassated by less than 2% while our senior headcount will have increased by almost 40% since spin. From my prospective, the current political and economic uncertainty around the globe creates a challenging backdrop for CEOs and boards to navigate. In this environment, clients are more discerning about quality advice, which plays to our strengths. By serving clients with excellence we are positioned to gain mind share and market share and grow in most any market environment. We remain confident in our near, intermediate and long-term growth prospects. Thank you. Now if there are any questions?

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

Hey good morning everyone.

Good morning.

Hey good morning. So first, I think, just wondering on restructuring versus the advisory business in the first quarter. It sounds like both were up year-over-year so you are seeing progress in both. And I'm just wondering for the first quarter is it benefit from any like elevated level of transaction fees in the restructuring business or is it kind of a normal quarter? And then second on a pickup in the other sectors you mentioned, it was power, retail, healthcare TMT. Would you expect that trend to continue?

Well, as normal a quarter as any quarter it could be every quarter is obviously a bit different, but there was nothing extraordinary in terms of timing of significance to the quarter. I think it reflects the continued success of our restructuring business and we certainly see that success continuing. I think there is no doubt that the composition of restructuring candidates will continue to shift and pivot away from energy dominated to a broader days. And we are in the midst of that mix shift right now and we are certainly doing our best to maintain and increase our market shares in the restructuring environment. And I think it's fair to say that by separating the business from Blackstone, every day that passes and every day that our strategic advisory team strengthens, our restructuring team gets more looks, more opportunities and sees more success on a relative basis.

Okay, that make sense. And then on the outlook for Park Hill, how much clarity do you have on that businesses pipeline? And is it that clarity that's giving you confidence for the balance of the year?

I think the short answer is yes.

Okay, fair enough. And then just one on expenses, was this a pretty clean quarter for non-comp, you know last year there were some kind of one-timers. But if I look at what you guys reported for 1Q, is that the right number to build off of?

Yes, it was a clean quarter. We would expect a modest uptick in the expenses as the year goes on. I think the first quarter tends to be the historically lower, but it was a clean quarter.

Okay, very good. And just last, if you want to give an update on hiring just kind of where you guys are looking how receptive have been to the platform? Any view on how you think this year is going to be from a like your advisory business hiring standpoint, thanks.

Well Mike I think it's fair to say that we have a tremendous amount of interest in individuals joining our platforms. We are being incredibly discerning about the partners who we add and in what areas to make sure that every addition is quite accretive, which means it needs to help build a critical mass. And if you look at our hiring patterns, we added an equity markets, equity capital markets capability which duck tales with the leverage, finance and restructuring capabilities that we have, so we are building out a much strong capital markets advisory team. If you look at what we've done in real estate, we've added two partners with incredible impact and wonderful credentials and client connectivity and then we have the Park Hill real estate, bankers who together create true critical mass there. We have hired two recently industrial bankers with adds to other strength that we have. So we are trying to build out sectors of excellence and from excellence to have increasing market influence that’s the strategy. At the same time we have made the point, the individuals have to be very consistent with the partnership culture and they have to be best-in-class. So we see the marketplace as opportunistic and we will continue to add partners as the right time and fit, we've have a lot of dialogs where the individuals have identified themselves as very interested in the platform, we are quite interested in them and then we are just waiting for the right time for us to make the move together. So I'm continuing to be quite optimistic about our hiring, but like everything else it's not machine like Swiss precision one amongst, it tends to be in clumps and that’s what you will see over the next few years.

Got it. Okay thank you.

Thanks.

Your next comes from Devin Ryan from JMP Securities. Please proceed.

Hey thanks. Good morning Paul, good morning Helen, how are you guys?

Fine, thanks.

Fine, thank you. Much better than I was on the last earnings call.

I know, right, I remember. So just curious on a question on just kind of the M&A, commentary from some of your peers, we've been hearing a lot about a cooling and kind of mega deals, but the middle markets remained open and some companies actually feel like that’s an area that’s been picking up, and doesn’t obviously captured that well in the industry data sources that we all cite. So it sounds like outlook is a bit mix for the industry activity, you have been right obviously over the past several quarters. Just curious about the comment more on large multinational clients, or are you also seeing kind of slower level of activity in the middle-market and then what is the scenario where things really change or what we can really take off from this level.

I appreciate you giving the report card on forecasting, I'm going to continue to make predictions until I'm wrong and then I'm going to withdraw for a little bit. So while I'm on a winning streak, I will continue for a little bit here. I would say this following, if you step way back, way, way back we are simply debating how favorable and how constructive the current M&A environment is by historic standards. And the answer to that is its quite constructive, it's quite favorable. It may be have cooled off, from absolute unsustainable record levels, but as a general proposition the level of M&A activity measured by almost any traditional benchmark is quite healthy. And I think sometimes in this discourse about is it going to be up or down, x or y percent we lose perspective, so that would be the first thing. Second thing I have said is that the current political and economic uncertainty does not show or affect all deals. There are many transactions that will continue apace regardless of who occupies the White House regardless of what tax policy is regardless of elections in France. And for the vast majority of transactions they are not particularly influenced by some of the factors that we are talking about. But clearly at the margins, those transactions that are influenced by those factors will either be slowed or paused, put on hold until greater clarity develops. And I think that's what you are seeing and that's why we had suggested that this year would be down about 10%, because we saw most of the transactions not being influenced, but at the margins we would lose some transaction activity. And I think it's fair to say that smaller transactions have less to do with overall Anti-Trust Policy, overall macroeconomic issues, whether or not cash to be repatriated from abroad, whether or not there is going to be a border tax, et cetera. So to me it’s sort of common sense that smaller transactions are less affected and you would see less impact. And I think that in fact has been the case.

Okay. That makes a lot of sense, I appreciate the color there. And then maybe a follow-up here on Park Hill, just to understand the dynamic in the placement revenues. Was it environmental this quarter or was it just idiosyncratic to the deal in that specific timing and it's a lumpy business and so it can kind a just bounce around. Just curious kind a how you would frame that.

Well I would certainly say its idiosyncratic, if you just look at last year I think we had something like $20 million in placement revenues, in the third quarter we had $40 million in the fourth quarter same business. So I have tried to make this point, I have reasonable clarity in thinking about our business year-over-year, it's very difficult to do that quarter-to-quarter. And Part Hill which in many respect is the steadiest of businesses, it’s quite unsteady when measured quarter-to-quarter, but remarkably steady when measured year-over-year. Having said that, if you ask me where the growth opportunities are, I would make a couple of points. The private equity business continues to be very robust, it's an asset class that continues to be in demand, there is an awful lot of capital out there, a lot of capital has been returned to LPs who intern are looking to redeploy that. And the private equity business has and continues to enjoy great success and we are part of that. The hedge fund business ironically was our strongest this quarter and of any macroeconomic backdrop you would expect it be the weakest. So we have always said that because we have the highest filter that at a flight to quality environment we would be better positioned than others. We've made the point that we think secondary is a long-term secular uptick and that's why we have invested in the business. And we made a partner promote in Europe, and we added a partner in the U.S. a late last year. And as we continue to build out our footprint in our strategic advisory those two businesses will complement each other and you will see more and we've also made the point that there is an environment change in real-estate where increasingly there is a preference for direct investment and we've repositioned our footprint and made a partner hire in real-estate to be able to capitalized on that. So I think there is some long-term trends which we continue to talk about, but quarter-to-quarter idiosyncratic.

Got it okay. That’s helpful. And then last one here just with respect to thoughts around acquisitions at the firm level. Are there any small acquisitions you would look at to think about accelerating growth into a sector or geography, especially with the stock moving higher here or obviously you are quite discerning around who is being added maybe that’s too broad of an approach. So just curious on your thoughts there.

While the first point on the stock moving higher, if you notice, we all continue to buy it, so that suggest that may be we are not delighted to issuing it at these levels, but that just my personal aside. I think like we are stewards of every one’s financial investment and we are always going to look at things and we are going to be broaden our thought and we are going to be always trying to figure out ways to advance the practice and to move ourselves forward. And if there is an opportunity to buy versus build we are certainly open to looking at things, but it has to have an incredibly high bar, because we are very comfortable and have been very successful in organic build and we've said repeatedly that one of the big differentiators of our firm is partnership culture and we will never do anything to jeopardize that because in many aspects that’s such a wonderful advantage, we want to make sure we do nothing that doesn’t continue that environment. And therefore it's an extraordinarily high bar, but like anything else in the world, you have an obligation to at least hear people out.

Okay great. I will leave it there. Thanks guys.

Thank you.

And our last question comes from the line of Julian Craitar from Nomura. Please proceed.

Good morning everyone.

Good morning.

Good morning.

So just kicking things off with a question on revenues, specifically be revenue mix within the advisory line. How should we be thinking about that trajectory going forward, I know that M&A will continue to be an area of growth for you. And in your businesses specifically you would probably be less affected by the dampened animal spirits we are currently seeing in the market, but it seems at least like a coin to your commentary and then some of our peers that restructure may still have some. I'm just trying to get an sense as to where we will be seeing the incremental growth in that line item this year, whether it will be more waited towards M&A or towards restructuring.

M&A, I mean M&A is our growth driver that is the business where we have an enormous opportunity to take market share and we have an ability to take market share in most any macro environment and therefore I think you will see the incremental growth of our firm being increasingly driven by that, but I also think is the power of the three businesses operating as one, and sometimes it's very hard to figure out where that resides in the first, but it may get booked in one place. But it's really being able to take the network and to expand the network. And having these three businesses and having them work very closely and collaboratively expands our capabilities and our network and gives us more looks. So that’s why we tend to think about it as a holistic P&L, but I think it’s fair to say that the predominance of the growth for the next few years will be in strategic advisory.

Okay and just sticking with strategic advisory for a second, I know that you have said in the past that it's more of a market share story versus like a revenue story and I was just wondering, like a better outlook in Europe has helped pushed these plans along, these sort of funds along or is it more a like a the increased productivity from the new hires that have now been with the firm for at least nine to 12 months or is it something else that we should be thinking about.

My view on the macroeconomic environment is when you are starting with a small footprint, there is so many opportunities to be able to expand the presence of the firm and to be recognized for differentiated capabilities that you can do an awful lot of business in most any environment. Unless the world really shuts down for a while and that does happen from time-to-time. There are some global, political crisis where no one transacts, but unless you are dealing with really large deviations from the norm, I think we are very comfortable that we'll continue to do more business as our bankers are on our platform for longer as they have an opportunity to engage with clients and to turn that engagement into mandates, to turn those mandates into announcements, then those announcements need to be turned into reported revenues, there is just a lag time. And we are now going to start to see the first wave of that maturation process over the next year or so within the next wave of partner additions will do the same. So we are much more focused on our idiosyncratic story for a while than we are about the overall market. I think if you are a firm that has a leading or near leading market share, it's almost impossible to grow your business unless the overall pie grows. We are much more a slice of pie than a size of pie story for a while.

Okay. And then lastly just focusing just like piggybacking off of your comments. So it seems like yes, I think the growth is going to be coming from the M&A line and like you are very constructive on that. I was wondering if that outlook is reflected in your expense outlook particularly for the compensation ratio. I was just wondering if does it reflect the potential operating leverage that you could see if the M&A build out goes according to plan, and if it doesn't, how should we be thinking about the potential of operating leverage if your M&A business specifically does better than you expect?

Well look, I think we are still in aggressive growth phase, and since we are in an our aggressive growth phase we are making real investment and we are making an investment instead of building factories it's an investment in human capital and that's why you should expect to see a compensation as a percentage of revenue to be elevated relative to others for a while. We've taken a view that since our compensation ratio was 64% last year and we were aggressively adding folks that until proven otherwise, we are going to reserve at 64%. And we'll make adjustments at the end of the year if facts have changed. But overtime, I would expect that to come down, but right now we are being very forward thinking and making sure that if there are individuals that we can attract to our platform that are clearly additive from a shareholder perspective, we are going to do it even if it needs having elevated ratios for some period of time.

Alright. Thank you. That's it from me.

Thank you all for spending time with us this morning and we will speak to you on the next earnings call. Have a good day.

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