PJT Partners Inc. (PJT) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the PJT Partners second quarter 2018 earnings call. My name is Joyce and I will be the moderator for today. At this time, all participants are in 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.

Thanks very much, Joyce. And good morning and welcome to PJT Partners second quarter 2018 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 the 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' 2017 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 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 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.

Thank you, Sharon. Good morning, everyone, and thank you for joining us today. For the second quarter, our firmwide revenues were up 20% with advisory revenues up 34%. And while this is a quarterly report, we measure our progress in years, not quarters. However, with these six-month results, the full-year contours are beginning to take shape. Year-to-date firm revenues were up 15% versus year-earlier results, driven by solid gains in strategic advisory, secondaries and Park Hill real estate. These results are all the more satisfying as year-to-date restructuring revenues are essentially flat from year-ago figures, given the benign credit backdrop. Turning now to our businesses in a bit more detail. First on restructuring. As I mentioned, our half-year 2018 restructuring results were essentially unchanged from year-ago levels, reflective of low overall default rates. However, our second quarter restructuring revenues were up sequentially due to an increased number of closings. We continue to expect 2018 full-year restructuring revenues to be especially flat relative to 2017 results. Our restructuring book of business is highly diversified with energy/power, consumer retail, TMT and healthcare continuing to be significant areas of activity and focus. We continue to be recognized as a leading restructuring firm; and for the first six months of 2018, PJT Partners was ranked number one in announced restructuring transactions. As our Strategic Advisory business scales, we are benefiting from a broader base of potential clients, the ability to engage with these clients at earlier points of their decision-making processes and, most importantly, enhanced win rates. Turning to Park Hill, while Park Hill was down modestly in the second quarter versus a year ago, the business is up year-to-date, consistent with overall firm performance. This growth was largely driven by secondary advisory and real estate, two verticals we have previously identified as particularly benefiting from closer coordination and integration with Strategic Advisory. For full-year 2018, we expect the real state and secondary advisory verticals to be the principal drivers of Park Hill's growth. Turning to Strategic Advisory. In Strategic Advisory, we continued to invest by hiring best-in-class talent. We ended the second quarter with 33 strategic advisory partners, up 22% since year-end, up 43% from year-ago levels and up 83% since spin. Our hiring pipeline remains robust and we're in advanced discussions with a number of high-impact senior bankers. Overall, headcount in Strategic Advisory has also increased significantly, up 14% from year-ago levels and up 89% since spin. Our ever-expanding coverage footprint and capabilities have enabled us to broaden our engagement with a growing number of clients. We are advising a steadily increasing roster of blue-chip clients on important strategic matters. Our current mandate count continues to trend higher and is up meaningfully year-over-year as is the dollar value and number of announced transactions. Of note, our broad-based, highly-integrated, highly-connected global network has emerged as a differentiating factor for our firm on large, complex, cross-border transactions. We are confident that the strong foundation we have put in place will enable us to capitalize on all of the positive momentum we see in our business. And with that, I'll turn the call over to Helen to review our financial results.

Thank you, Paul. Good morning. Beginning with revenues, total revenues for the quarter were $131 million, up 20% compared with the second quarter 2017. The breakdown of revenues – advisory revenues were $98 million, up 34% year-over-year, with growth in strategic advisory, restructuring and secondaries. Placement revenues were $28 million, down 16% from the same period last year, with the decline in placement revenues driven by lower closing volume in the private equity vertical, partially offset by increased fundraising closings in real estate. Other revenues included $2.1 million in reimbursable expenses that we billed to clients during the quarter. For the six months ended June 30, total revenues were $265 million, up 15% compared with the same period last year. The breakdown of six-month revenues – advisory revenues were $202 million, up 17% year-over-year; placement revenues were $54 million, up slightly year-over-year; and other revenues included $4.4 million in reimbursable expenses that we billed to clients during the period. 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. Adjusted compensation expense continues to be improved at 64% of revenue. Adjusted non-comp expense was $25.6 million and included approximately $1.9 million of expense, which is billable to clients and was historically recorded on the balance sheet. On an apples-to-apples basis, excluding the impact of the change in accounting for this expense, adjusted non-compensation expense was $23.8 million, up 3% year-over-year. And for the six-month period, excluding year-to-date reimbursable expense of $4.6 million, our adjusted non-compensation expense was $47.5 million, up 8% year-over-year. Turning to adjusted pretax income, we reported adjusted pretax income of $21 million for the second quarter, up from $16 million last year; and $43 million for the first six months 2018, up from $39 million for the same period last year. Our adjusted pretax margin was 16.4% in the second quarter and 16.3% for the six months. Our provision for taxes, as with prior quarters, we've presented our results as if all partnership units have been converted to shares. So, that assumes all of our income was taxed at our corporate tax rate. The tax rate also takes into account the tax benefit related to the delivery of vested shares at a value higher than our amortized cost. This benefit has been incorporated in our annualized rate resulting in an estimated effective tax rate for the full year of 22.1%. And given the first quarter rate at play was 22.3%, we adjusted the second quarter rate accordingly to 21.9%. Earnings per share are adjusted as converted earnings, were $0.42 per share for the second quarter compared with $0.27 in the second quarter last year; and for the six months, $0.89 a share compared with $0.65 in the same period last year. On the share count for the quarter, our weighted average share count was 39.8 million shares. And during the second quarter, 1.25 million performance units satisfied the $55 share price condition. Despite the fact that the time vesting conditions have not been met for 1 million of these units, the full 1.25 million will be reflected in our weighted-average share count in the third quarter. As we've discussed on prior calls, partnership units, which are owned primarily by current and former Blackstone employees, can be exchanged on a quarterly basis. And to date, we've settled all exchange requests in cash. We're currently in receipt of exchange notices for approximately 256,000 partnership units and we intend to exchange these units for cash. With this upcoming exchange, we will have repurchased the equivalent of approximately 1.8 million shares year-to-date. On the balance sheet, we ended the quarter with $183 million in net working capital and no funded debt. And, finally, the board has approved a dividends of $0.05 per share. The dividend will be paid on September 19, 2018 to Class A common shareholders of record on September 5. I'll now turn back to Paul.

Now, turning to our outlook, we're unwavering in our commitment to build out a leading global advisory-focused investment bank. Behind the scenes, there has been an extraordinary amount of hard work involved in laying the foundations of our company. As we rapidly approach the three-year mark, we're now seeing the first tangible benefits of that investment. Our leading restructuring franchise is enjoying strong relative commercial success. Our Park Hill business is increasingly positioned to capitalize on a variety of strategic growth initiatives and our Strategic Advisory franchise is rapidly growing its roster of clients, mandates, announcements and completions. All of this progress is occurring against the backdrop of a culture that is differentiated by its focus on teamwork and collaboration, as well as excellence in client service. We remain optimistic about our growth prospects for 2018, 2019 and beyond. And with that, we will take your questions.

[Operator Instructions]. The first question comes from the line of Devin Ryan of JMP Securities. Please proceed.

Hey, great. Good morning, Paul, Helen, Sharon. How are you guys?

Good morning.

Good morning.

Good morning. I guess first question here, is you touched on the real estate and secondary advisory areas of Park Hill are better leveraging the firm's capabilities. I want to just get a little bit more perspective of where you think you are relative to maybe what that synergy could be just given that it's still kind of early days of leveraging those capabilities. And then, if you can, just any more perspective or anecdotes on what's different today and why that's working or why you're excited there?

Well, I think you said yourself. It's early days. And we've always maintained that the Park Hill business is a real jewel of a business that connects very well to our other businesses. And when you think about their broad-based, their web of relationships and their connectivity to hedge funds; private equity funds; and within hedge funds, credit funds and emerging market funds; and their global distribution network, there are so many ways to tap into it. If you think about the secondary space, we now have a front-end origination business, which is touching more and more financial sponsors. So, those businesses, which always had a strategic logic to work closely together, now have a front-end that is better built out, more developed and is creating some tremendous tailwind to that business. And in a similar vein, we have a leading real estate banking franchise, and being able to connect that together just means that there is more joint client presentations, more cross staffing, more opportunities for there to be idea generation and for us to better serve our clients. I think we're in the early days. It's something that we've talked about from the beginning, but now, three years in, we're beginning to see some of the tangible rewards of the hard work that we've put into this effort.

Okay, terrific. Great color. Thank you. Second question here, just on the recruiting and some of the commentary. So, you added one new partner in the quarter. It sounds like a lot of your conversations that you've been having are ongoing. So, I know you can't necessarily pick the date that everybody joined, but I'm curious if you have a sense of whether we should still expect a fair amount in the back half of this year or just given kind of where we are in the year that timing probably pushes more towards early next year, just trying to think about some of the timing there.

I think we've been consistent that we're a 365-day-a-year recruiting firm, in that we're not particularly tied to the calendar. We're tied to identifying the right individuals, making sure those individuals are not only the right fit, but are really committed to this platform and then we're just trying to be opportunistic. If you look at where we were last year, we ended up with – I think more of our partner hiring was in the second half of the year. I think there is no commitment to that, but I certainly would not be surprised if we ended up with a back half weighted recruiting calendar. And that's just sort of the way it is. We've always said that our hires are likely to come in clumps as opposed to a regular way, one per X number of weeks or months. And we're highly confident that the firm and its story is resonating. And we're deep in discussions and, inevitably, we'll have additional partner additions which will just enable us to take the franchisee to yet another line.

Okay, great. And just last one here, maybe a little bit higher level, just love to get – maybe some broader strokes on kind of the M&A that you're currently seeing and really just what are the biggest themes that your clients are asking you about or are focused on in both US and Europe? And then, where do you still think the runway is greatest in the cycle? Where does it at least feel like today? I know that's kind of a big question of where we are in the cycle, and PJT isn't necessarily going to be connected to the cycle, but I'm curious your view since that kind of macro overlay still affects the company.

Yeah. Let's start with the second half of that first. I think there is clearly a long-term secular change where M&A, as part of the toolkit, is going to be used with ever-increasing frequency. And as a result, whatever one thinks of a steady-state level of M&A, and if one wants to peg it to values as a percentage of global market cap or global GDP or any of those benchmarks, whatever your setpoint was 5 or 10 years ago, we believe, with great conviction, that that setpoint is higher and will remain higher because, as the world speeds up, more dislocation, managing in a changing world, that requires clients to respond and to be more proactive in managing their portfolio and to constantly ask themselves whether or not they have the right suite of products and services, do they have the right capabilities and has the world changed in ways that may cause them to rethink some of the assets they currently own. So, that is not, in our mind, going to change and we see that as an up into the right type of trend. At the same time, this is a deeply cyclical business. And we are dealing with, if not perfect launch conditions, we're dealing with pretty good macro conditions when you think about global GDP growth, when you think about benign interest rate levels, tremendous access to capital, high valuations in the equity markets. That inevitably will change and those conditions will be less hospitable. And when they do, there's no doubt that there'll be contraction in M&A. So, I think there's probably more downside than there is upside in the near-term just because we're operating at reasonably strong levels. But having said that, the levels that we're operating at today are sufficiently deep that, even if one were to pull back from that any reasonable percentage, you're still dealing with a very robust M&A market by historic trends and historic levels. So, that's sort of the macro backdrop. The micro for us is we don't spend a lot of time on that because, ultimately, we are much more of a market share than a market growth story. We don't need the market to grow. We can grow our advisory business in a contracting M&A marketplace because, as the brand is better established, as we have more and more foot soldiers, as our coverage footprint builds out and our capabilities continue to fill in, we become increasingly competitive in a competitive world. So, what we're focused on and what others maybe focused on are perhaps two different things. And I think on the first half, do you want to just go back? Is there a particular point you'd like me to go back on in the first half of your question?

Yeah. It's actually – I'm just trying to get some flavor for – in the conversations that you guys are having with these kind of important companies globally, what the themes are in those boardrooms or kind of where are they focused most? And is it that world speeding up and do we have the right mix of assets? Is it uncertainty geopolitically? Or I guess, where are they focused and kind of what's either driving their enthusiasm or maybe create some restraint in doing something?

There may be a macro backdrop. But at the end of the day, almost every corporate decision is made on micro terms as to what's the competitive set for any individual company, what are the competitive threats, are there attractive targets, are there ways in which their business can be either defended or can head to another level? So, it gets very micro in the boardroom, although it all gets rolled up to a macro trend. If there is one friend I would say that increasingly companies are focused on, it is in a world in which there is such severe dislocation and managing through that change requires a pivot with one's business model or to think about inorganic growth in ways that they hadn't thought about before. When it involves larger companies, by necessity, the targets get larger and larger. As the targets get larger, it's rare that one finds a perfect fit because large complex organizations don't necessarily fit perfectly with one another. So, I think there's a lot of discussion about what's the actionable set of potential merger or acquisition candidates, how well do they fit. And the larger the transaction, the more regulatory scrutiny, the more that one is at the mercy of regulatory authorities, not just in their home market, but around the globe. And as there is ever-increasing time to close from announcement to closing, now you have to then inject the whole issue of whether or not the valuation that's struck at announcement can hold for an extended period of time. And with shareholder votes that oftentimes are back-end determined, you end up with lot of externalities. And trying to land the plane on an announcement to a closing is more challenging in the current environment than it's been. And all of those issues feed upon one another. More regulatory scrutiny, which, in turn, is a function of the targets are getting larger. So, you have larger targets, inviting more regulatory scrutiny, you have a less coordinated regulatory regime around the globe. So, every sovereign is looking at all of these competitive combinations through their own government lens, which then creates longer periods of time between announcement and closing, which then means valuations are constantly moving in a changing world and you have shareholders who are deciding whether or not to approve these transactions. That creates a big burden. And while it hasn't slowed the number of very large transactions, it certainly has made closing many of these large transactions that much more challenging.

Got. Appreciate all the context there, Paul. Thanks for taking my questions.

Sure.

The next question comes from the line of Sumeet Mody with Sandler O'Neill. Please proceed.

Hey, good morning, guys.

Good morning.

Just a couple quickly up here. Might be more of a Helen question, but we've seen a material impact of ASC topic 606 on at least one of your peer's results this quarter. Just wondering if you guys caught any of that this quarter or if you'll even be seeing – be accounting that way going forward? Or will kind of the revenue recognition still be dependent more on the date of closing? Any color there would be helpful.

Just looking at our quarter, all the transaction fees that we booked in the quarter were for deals that closed in the quarter. So, we didn't have any other timing impacts.

Okay, great. Thanks. And just one on the buybacks. Saw a nice pickup in the quarter on open market purchases. Just wanted to get a feel if we should get comfortable at this level or is it the kind of market dependent going forward?

I think there are a number of tools that we use. The first one that we've talked about is the exchanges. And you notice, in the first quarter, the number of exchanges was very high. It was a bit lower in the second quarter. So, I think we use both – sorry, all three niches, [indiscernible] exchanges and open market repurchases. So, we'll continue to look for all of those tools.

Got it. Okay. Yeah, that's it from me. Thanks.

Thank you.

The next question comes from the line of Mike Needham with Bank of America. Please proceed.

Hey, good morning, everyone. First one I had is on…

Good morning.

Hey, good morning. The first I have is on the advisory field trend. The number of clients paying you more than $1 million increased pretty meaningfully in 2016. It was a little bit flatter in 2017. And I'm wondering, are you seeing that pick up again this year? And then, that metric in general, just the number of clients paying you million dollars or more, is that the right metric to kind of track how the advisory business is progressing?

I don't spend that much time focused on that metric, but we're required to report it. So, we report it. We do look at it. And it does show that there's been an increase in our client base, which, in my mind, is what one would expect as we continue to build our footprint. And I've talked repeatedly about the number of mandates and how our mandate count has increased as well as the number of announcements, our backlog. So, we look at all of those metrics, but I think that's a pretty blunt instrument. So, when we think about what are the important KPIs, it's trying to understand how many mandates we have in-house because that's a leading indicator, it's trying to understand the quality of those mandates. The more complex the assignment, the larger the client; all else equal, the larger the fee opportunity is for us. And we're always looking to see whether or not our coverage universe is expanding, are we in dialogues with more companies, are we working with them as a lead advisor, have we moved up from being given an opportunity to work with a new client, to solidifying that experience and becoming an ever-increasingly, more drawn-upon trusted advisor. So, it's a whole host, Mike, of metrics that we look at. And I think on all of the leading indicators that we looked at, we see that we're making significant progress in building out our firm. And it's nice when you have some supplemental data in the financials that are aligned with that. But that's not really the principle basis upon which we manage or judge our firm.

Okay. All right, got it. And then, for the advisory business, I think in your comments, it sounded like you have a fairly good idea – or at least, the rest of the year is starting to – the full year is starting to shape up. If restructuring is going to be kind of flat this year, fund placements seems to be growing in the two groups that you highlighted, for advisory, I'm not sure if I missed it, is that kind of where the growth is going to come from this year and is the ramp continuing this year based on the strength of your pipeline?

Yeah. I think that's fairly said. For the first half of the year, firmwide revenues were up 15% and the restructuring business was flat. So, the engine of growth has been the Strategic Advisory business. Now, quarter to quarter, there will be variability, but that trend should continue to be up into the right. And as that business continues to mature and scale, we expect to see more and more in not just percentage terms, but absolute contribution from Strategic Advisory. That is the principal growth engine of our firm over the intermediate and long-term.

Right, okay. And then, just last one for me on hiring, hiring has been really strong at the partner level and below, as you scale, does it get any – I don't know – incrementally harder to attract people who want to be part of a more startup-like advisory firm? And then also, just broadly on the labor market, things appear to be getting more competitive, compensation is picking up some. And some of the bigger banks, they are trying harder to retain people. Is that affecting the people that you're after at all or is it not? Thanks.

No. Look, we have a unique value proposition. And that's unchanged. And the individuals who are attracted to this platform see many things in this platform that don't exist elsewhere, and that differentiation is a competitive advantage for us. And we haven't seen that recede in any way, shape or form. As far as whether or not it slows as we build out, I think we have a push and a pull here because as we build out our firm, it becomes ever clearer to an ever-larger audience that this firm really is building something special and there's an opportunity for them and that that they can win and really flourish off of this platform. And the more of our hires that succeed on this platform, the more it's easier for others to independently corroborate just how special a place we're building. But since we have so many areas that we're not in, we still have all the white space. So, as we go into new areas, whether it's a new industry vertical, a new product capability, even a new geography, we have this exquisite sweet spot of being more and more established every day, but having so much white space in front of us. And I think that's what resonates. So, in the current environment, we're quite optimistic about our ability to continue to grow and scale our business, but it's hard work. And it's most important to make sure that the individuals that we hire are the right individuals and that they come when they're ready to come and, therefore, it's always going to be lumpy and you're going to see regular way increases in headcount. And we also don't think that there is benefit in sort of promoting this or putting out endless press releases. We're going to be much quieter about what we do. And then, on a quarterly basis, we can aggregate; or on an annual basis, give you a better sense about just what you're seeing below the surface here.

Got it. Thanks, Paul. Your next question comes from the line of Jim Mitchell with Buckingham Research. Please proceed.

Hey, good morning. Maybe, Paul, I think you alluded to this earlier. How are you thinking about or your clients thinking about sort of the NXP deal? Chinese regulators, obviously, stepping up potentially. Has that put a chill on large transactions or is there –do you see that as an elevated risk to deals already in the pipeline? How do we think about that and how your clients are reacting?

Well, Jim, I'd rather not talk about a specific transaction. I will talk about some key trends. I don't think it's going to pretty much of a surprise when I say that I think Chinese investment into the United States is likely to recede dramatically, as well as US investment into China until there is a resolution to some of the heightened trade and tariff rhetoric on both sides. So, inevitably, that will calm down. And when it does, you may see a return to more regular way commerce from a strategic perspective, but, in the near term, you have to imagine that that's going to take a very substantial step backwards. I'm more focused on the fact that large deals are increasingly required if you have a changing world and a lot of the actors are themselves large capitalization companies. Inevitably, many of the targets are themselves going to be large. And as a result, you're starting to see larger and larger players decide themselves that they either don't have the full toolkit or they need to make a strategic pivot or they need to change their business model. And as a result, the pool of potential merger partners, acquisition candidates, many of those companies are getting larger and larger. And as they get larger, you're dealing with 5 into 4, 4 into 3 horizontal consolidations, you're dealing with questions about vertical mergers. And regulators have all sorts of different perspectives. S, you're just dealing with a complex chess game. And as you have larger transactions, which are less straightforward to see how they move from announcement to completion, it creates a bit more hesitation in the boardroom. And I think what we see an awful lot is there's a realization that unless they – meaning, the clients – are thinking more boldly about their strategic ambitions, they run the risk of missing out. Yet, by being bolder, they're putting themselves in harm's way. And there's just no getting away from that. And the reality is that time to close has been pushed out. There's probably fewer transactions that get to the goal line. And that does give companies pause. But at the end of the day, with full knowledge of that, we're dealing with a pretty robust M&A environment. So, I think it's a risk factor. It's something to be considered, but in and itself, I don't see it as having a chilling effect on the overall M&A market.

Okay, great. That's really helpful. Thanks.