PJT Partners Inc. (PJT) Q2 2019 Earnings Report, Transcript and Summary

Good day everyone and welcome to the PJT Partners Second Quarter 2019 Earnings Call. My name is Katrina, and I’m your event operator. [Operator Instructions]. And now I’ll hand over to Sharon Pearson, Head of Investor Relations. Thank you, Sharon. Please go ahead.

Thanks very much, Katrina and good morning, and welcome to the PJT Partners Second Quarter 2019 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 PJT Partners 2018 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 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 and thank you all for joining us today. For the second quarter, our firm wide revenues increased 28% versus a year ago to $167 million with advisory revenues up 35%. Year-to-date firm revenues increased 11% with advisory revenues up 18%. We recognized that it isn’t always easy to follow, let alone appreciate all that we have accomplished when viewed through a narrow 90-day lens; the wider the lens the clearer the progress. Four years ago, this firm didn’t even exist. Today, we are a destination for best-in-class talent at all levels. We’re advising a growing roster of blue chip clients on their most important strategic matters. We are winning mandates and announcing transactions in more industry sectors and geographies. We are delivering a broader suite of capabilities and competencies to our clients resulting in a greater share of mind and market. Our brand is increasingly recognized around the world. As always, we continue to measure our progress in years not quarters. We began the year expressing high confidence in our prospects, but cautioning that 2019’s growth trajectory would not be evident until mid-year. Today, at the mid-year mark, we are as confident as ever in the underlying drivers for each of our businesses and we continue to be confident in our ability to deliver meaningful growth for all of 2019 and beyond. Now turning to each of our businesses in greater detail. Turning to Restructuring. Revenues grew significantly in the second quarter compared to the prior year and are ahead of last year’s levels for the six-month period. Our Restructuring business maintained its leadership position, ranking Number One in US and global completed restructurings for the first half of 2019. Our outlook for the full year remains essentially unchanged, notwithstanding near record low interest rates, historically low default rates and extremely benign credit conditions, we expect restructuring revenues for the full year to be flat to only modestly down. Despite this muted macro backdrop, we are working on an increased number of Restructuring mandates, which should serve us well entering 2020. Turning to Park Hill. Overall revenues grew modestly in the quarter due to better performance in our hedge fund business. While year-to-date, Park Hill revenues are down slightly year-on-year. Park Hill remains on track to deliver another record year. Given the timing of anticipated closings, we expect 2019 Park Hill results to be heavily weighted to the fourth quarter. Turning to Strategic Advisory. Revenues increased for both the quarter and the six-month period compared to last year. The momentum in our Strategic Advisory business continues to build since our last earnings call, we have seen an increase in the number of active mandates, an increase in the size, complexity and revenue potential of these mandates, and an increase in the average size and associated revenues of our announced but not yet closed transactions. As we said last quarter, the further we get into 2019 the more this momentum in Strategic Advisory will be reflected in our financial results. Our Strategic Advisory business continues to benefit from the addition of PJT CamberView. The additional capabilities of PJT CamberView are enabling us to enhance our relationships with new and existing clients and provide increasingly differentiated advice across all aspects of governance and shareholder activism. On the talent side, while we endeavored to hire on a year round basis, our hiring often comes in bursts. Given recent senior recruiting, our Strategic Advisory partner count will grow by five in the third quarter, including a partner who will focus on cross divisional initiatives. Additionally, below the partner level and excluding our robust campus hiring program, we have hired more than 30 Strategic Advisory professionals’ year to date. I will now turn the call over to Helen to review our financial results.

Yes. Thank you, Paul good morning. Beginning with revenues. Total revenues for the quarter were $167 million up 28% from $131 million [ph] in the second quarter last year. The breakdown of revenues. Advisory revenues were $133 million, up 35% year-over-year, with growth in both Strategic Advisory and Restructuring. Placement revenues were $29 million up slightly from the same period last year. For the six months ended June 30, total revenues were $295 million, up 11% year-over-year. The breakdown of six-month revenues -- Advisory revenues were $238 million up 18% year-over-year, driven primarily by growth in Strategic Advisory. Placement revenues were $52 million down slightly year-over-year. Turning to expenses, consistent with prior quarters, we have presented the expenses with certain non-GAAP adjustments and these adjustments are more fully described in our 8-K. First, adjusted compensation expense. Adjusted compensation expense continues to be accrued at 64%. This ratio represents our current best estimate for the compensation ratio for the full year. Turning to adjusted non-comp expense. Adjusted non-comp expense was $31.9 million for the quarter and $62.9 million year-to-date. When compared to prior period’s last year the increases are mostly due to the addition of expenses associated with CamberView as well as increased headcount and higher business activity in our other businesses. Looking at our non-compensation expense on a sequential basis, second quarter non-comp expense was up $1 million or 3% compared with the first quarter 2019. This increase was largely due to increased occupancy expense reflecting the costs associated with the full quarter of our additional space in London. Turning to adjusted pre-tax income. We reported adjusted pre-tax income of $28.1 million for the second quarter and $43.2 million for the first six months of 2019. And our adjusted pre-tax margin was 16.9% in the second quarter and 14.7% for the first six months. The provision for taxes as of prior quarters, we’ve 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. The tax rate also takes into account the tax benefit relating to the delivery of vested shares during the quarter at a value higher than their amortized cost. This was a lower benefit in 2019 than in prior years. We’ve annualized this benefit resulting in an effective tax rate for the full year of 25%. Earnings per share. Our adjusted if-converted earnings were $0.51 per share for the second quarter compared with $0.42 in the second quarter last year and for the six months, $0.79 per share compared with $0.89 in the same period last year. On share count for the quarter, our weighted average share count was 41.1 million shares. During the second quarter and six months, we repurchased the equivalent of 670,000 shares and 1.1 million shares respectively through open market share repurchases, net share settlements and exchanges of partnership units for cash. We’re currently in receipt of exchange notices for approximately 109,000 partnership units, as we have done in the past, we will exchange these units for cash. We have approximately 107 million remaining under our share repurchase authorization. This will provide us with continued flexibility to manage dilution over time. On the balance sheet; we ended the quarter with $86 million in cash, cash equivalents and short-term investments, $147 million in net working capital and $30 million in funded debt. And finally, the Board have approved a dividend of $0.05 per share. The dividend will be paid on September 18, 2019 to Class A common shareholders of record as of September 4, 2019. I’ll now turn it back to Paul.

Thank you, Helen. Turning to our overall outlook for the year. We expect the rate of growth in the second half of this year to be stronger than the first half with a heavy weighting towards the fourth quarter. We continue to be confident that all the pillars are in place for broad based success in the second half of 2019 and beyond. And with that, we will now take your questions.

Operator?

[Operator Instructions] The first question is from Devin Ryan, JMP Securities. Please go ahead, you’re live in the call.

Great. Good morning, everyone.

Good morning, Devin.

So maybe just start here, appreciate the update on the outlook. We clearly have seen the momentum over the past couple of months and what’s kind of visible publicly so maybe just to touch on that a bit because it’s consistent with what you had been speaking about. Some of the larger announcements in recent months, is that function of just senior bankers maturing on the platform so they’re just carrying kind of relationships over to the firm and so that’s kind of the wins that we’ve seen thus far? Or are there kind of tangible examples or maybe they are all tangible examples of situations where you’re really seeing kind of the collaboration of what PJT is and what you’re building to win business and kind of the collaboration of everyone working together? So I’m just curious if there’s any kind of anecdote you can provide around some of the -- without maybe being specific on the deals -- how you’ve been able to win some of these high-profile assignments? And whether you’re seeing the benefits of that collaboration already?

Well, thank you for the question. And I think there’s a lot in that question. So some of this is -- we look at all the progress we’re making on a constant basis, day in and day out. And we have seen for a considerable period of time that the strategy is on track, that it resonates with clients, that we’re advancing our discussion and our position with new and existing client relationships. But until some of that progress becomes apparent to the outside world that, that is the lagging indicator so we know early on whether the partners and other professionals who are coming over to our platform are the right individuals whether they’re getting traction with clients, whether they’re engaged in strategic discussions, whether they have the trust, the confidence of their client base. But to go from that, to then have that turn into a strategic mandate, to then have that ultimately lead to a successful transaction is a long period of time so some of that is just a simple natural evolution or maturation of that. Having said that, we have always talked about our firm as delivering big firm capabilities with a small firm feel, meaning, we’re assembling an extraordinarily broad array of skills and competencies that resonate with clients. And because of the individuals that we’re recruiting, because of our compensation structure, we have teams who choose to function as teams, who know that, that’s the best way to serve clients and that’s increasingly resonating with clients. And I’ve also talked about that in Europe, as an example, a disproportionate amount of the strategic work that we’re doing in Europe is cross border. And that one of our compelling advantages is the way in which we knit together a global team. If you look at Restructuring the number of assignments which are jointly staffed between Restructuring and Strategic Advisory is quite considerable, it’s near half. And if you look at what we’re doing with our CamberView capabilities and embedding that and integrating that into the business, it’s all a part of what we set out to be from day one.

Got it very helpful, thank you. And then just maybe to drill in a little bit more on Europe, where you guys have a nice franchise. We’ve been hearing some, I think, more constructive commentary from the group just around what’s occurring in Europe and particularly, Continental Europe that the outlook there feels like it’s starting to improve. And I know in the UK, may be a little bit of a different story. So I’m just curious kind of your overall views on the European franchise? And then just more broadly, kind of the macro backdrop for Europe, which has been pretty challenged in recent years?

Well, we feel very positive about our European franchise. We have had a significant number of wins and many of those have leveraged our global access and reach and deep industry expertise. And we also have a platform which, on a relative basis, is among the smallest, if not the smallest. And we like the size of our platform and we’ll continue to expand and grow it. But we think how effective we’ve been relative to the number of resources committed that we’re in a very good position to continue to grow the business regardless of the European macro backdrop. So I think that is something which is quite specific to our firm. Having said that, I’ve also said on previous calls, that even if you look at Brexit, even in the midst of all of the Brexit uncertainties, you’re seeing companies who are UK-listed, headquartered in the UK, who have global reach be a strategic interest to companies outside of the UK and that, that has not in any way really deterred their strategic interest in those companies. And we’ve also made the point that we believe that financial sponsors have accumulated a very significant amount of capital to try and take advantage of dislocations whether it’s an exchange rate or just in terms of investor sentiment. And we also have talked about the fact that there are a number of companies in the UK that themselves have global reach and global ambitions and we would not be surprised to see some of those companies look to increase their exposure to markets outside the UK. So that’s just a way of suggesting that we see significant activity in most any reasonable environment. And given how early we are in our evolution and given our quite small footprint, we’re comfortable both expanding it. And we’re also comfortable that we can continue to grow our results in almost any environment in Europe.

Terrific. Just last one here on expenses. If you can maybe touch a little bit on kind of the operating leverage? You’re starting to see or expect just on all the fixed costs in the system today? And really just trying to think about how maybe non-compensation expenses will grow from here, how you expect them to grow from here? Obviously relative to revenues, which I would think should be growing faster at this point?

First of all, I would say that we continue to be disciplined in managing our expenses. And there will be some quarterly variability in our non-comps which is business activity related. And having said that, our operating expenses are reasonably evenly spread throughout the year but our revenues are not. And this year, as Paul mentioned, our revenues will be skewed to the fourth quarter. So it’s going to be difficult to see any operating leverage on the non-comp side until we get full year results. But directionally, over time, as revenues grow, we do fully expect to see operating leverage.

Right. And I guess, I’m thinking more -- because I get the variable component. I’m thinking more of the fixed non-compensation costs, because I would think that there’s -- you should be -- start to see some nice leverage off of that piece just with less infrastructure or I guess spend needed?

Yes. We look at our fixed costs now probably around 60%. And if you look historically, the fixed cost has definitely grown at a lower rate than the variable cost. So we would expect that going forward.

Great. Thank you very much.

The next question is from Richard Ramsden, Goldman Sachs. Please go ahead, you’re live in the call.

Thanks a lot. Paul, perhaps you can update us a little bit on where you’ve got to in terms of building out some of the verticals? I know earlier on in this year you were talking about growing pharmaceuticals, industrials, financials and various other sectors. Is that process largely complete? And have you seen any significant changes in the recruiting environment so far this year?

I don’t think we’re ever going to be complete in the sense that if we can add individuals to the platform who can either take a very strong franchise and create more of a moat around it relative to our competitors or can get us into a vertical where we’re not currently in. And we’re going to constantly evaluate talent. And these verticals are so large and so global that even in those areas which are relatively advanced for us, Richard, they are still quite small in terms of resource commitment relative to the firms that we compete against so what I try to educate investors about is, you almost need to think about this as a cohort study. You need to look at early on where did we make some initial investments? And then if you look out two or three years, can you start to see some tangible results. And then there are other verticals where we’ve made those investments as recently as this year. And that will take some period of time for you all to see the progress, even though we may see it nearly instantly. So that’s our perspective. I did make the point that early on we were committed to building out an important practice in Europe. And that was one of the earliest places where we thought we got to minimum -- minimum necessary scale. And that we, in relatively short order, saw some real results. We, in short order, had that minimum requisite scale in TMT, and we saw those results early on. And we’re making significant investments in a whole variety of other verticals. But we’re always going to be driven by the talent that’s available, which will inform which verticals we augment or which verticals we enter as opposed to committing that these are verticals, we need to be in. And on the recruiting environment, I think the fact that we will add five senior partners who we think are extremely talented in one quarter alone speaks to the fact that our proposition, our brand, our story resonates. And we think there’s still an enormous reservoir of talent out there who increasingly would prefer to be on a smaller advisory focus platform and we believe that the more success we have, the more apparent it becomes to others that we’re the right home for them. But even that is going to be a bit lurching from side to side, where if we don’t believe we have the right individuals we’re not going to compromise just so that we can inform you all that we’ve made some additions. And that’s why our year-to-date has been so lumpy. And a lot of these conversations just take long periods of time because we’re dealing with individuals who are very successful at their incumbent firm, to have a compelling reason to leave because there’s no urgency for them to leave. And for many of them, they’ve informed us that they’re not sure whether they’ll leave, but if they were to leave their incumbent firm, we would be the destination. And one of the things that we’re very focused on is just being patient. And we’d rather wait a little bit longer and get the right individual then sort of swing in a bad pitch.

Okay. Great. And perhaps as a follow on. Can you talk a little bit about financial sponsor activity? And how you think the cadence of activity in financial sponsors is going to track in the second half? I mean we certainly haven’t seen much of a pick up at least in the public data. And I’m just kind of wondering what’s holding that back?

Well, I mean people talk about all of the dry powder in financial sponsor land. And you really have to drill down as to where that dry powder is because for many of these companies, they have become so successful as asset gatherers that they have moved into all sorts of adjacent verticals. So some of them have moved aggressively into infrastructure, some have moved aggressively into ventures, some have moved aggressively into real estate and elsewhere. So when you look at all the dry powder, you need to sort of ask yourself how much of that dry powder growth is really directed at traditional regular way buyouts. And I don’t believe that number has grown as much as overall dry powder has. And I do think you’re starting to see, certainly in Europe, there’d be more sponsor activity because there is a dislocation and a disruption in equity prices. We’ve been involved in some of that sponsor activity in Europe. And there’s been a fair bit that’s suggested or rumored out there. So I think you’ll see an increasing amount of sponsor activity. And I suspect you’ll probably see more of that growth driven outside the US, where arguably there are greater dislocations and maybe more value opportunities than here in the US market.

Ok, thanks a lot.

Thank you.

Your final question is from Jim Mitchell, Buckingham Research. Please, go head you live in the call.

Well, good morning, Maybe, Paul, you could talk a little bit about internal talent development. You noted that there is about 30 hires in Strategic Advisory below the partner level. Can you talk a little bit more about where they’re coming from? How you feel about the progression of the talent under partner level? And how you think about getting more and more internal partners over time?

Well, we’re absolutely committed to having a sustainable firm where over time the preponderance of the new partners are internally promoted. The reality is when the entire firm has been in existence for three-plus years, you’re not going to see that much evidence of people starting their career at our firm at age 21 and making it all the way up to partner in three-plus years. But that certainly is what we are focused on. So we start at the entry level. The fact that we get nearly 8,000 applications for summer positions. And that we’re sending offers to plus or minus 1% of those folks who want positions at our firm. I think it’s evidence that we’re onto something quite positive. We’re tapping into something. And if we can get the best talent at the most junior levels, then we have a competitive advantage to keep those individuals developing through our firm. We always have focused on training talent, development and culture. We have a lot of competitive advantages where individuals can learn this business better, we believe at a firm like ours and our firm specifically than elsewhere. We’ve promoted from within a number of individuals up to partner. Some of those were hired externally as non-partners and over time became partner. And others have been with our firm or predecessor firm for a significant period of time. And we’re incredibly focused on ensuring that we’re getting best-in-class talent at all levels. So I know we spend a lot of time talking about partner count and partner activity. But it really does take a village. You need to have best-in-class talent at all levels. And there’s no doubt that the stronger the junior team is the easier it is to be successful with clients and the easier it is to recruit more senior people. And it works in reverse. So we’re very focused on giving people feedback, training, development. And we don’t just talk it, we do it. But I’d rather do it then talk about it. So that’s what I’d say on that score. Okay. I think that concludes our call, and we’ll speak to you on our next earnings results. Thank you all very much.