PJT Partners Inc. (PJT) Q4 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the PJT Partners Full Year and Fourth Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s call is being recorded. And now I would like to hand the call over to your host, Sharon Pearson, Head of Investor Relations at PJT Partners. Please go ahead.

Thanks very much, Jake, and good morning, and welcome to the PJT Partners Full Year and Fourth 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 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. We continue to measure our progress in years and not quarters. And today, we are pleased to report our full year 2019 results. And with this full year lens, the considerable progress we have made becomes that much clearer. We began 2019 highly confident in our top line growth prospects and in our ability to deliver bottom line operating leverage. Our full year results affirm this confidence as revenues grew 24%, adjusted pretax income grew 33% and adjusted earnings per share grew 26%. These results were achieved in an environment where the number of M&A transactions worldwide declined as did the dollar value of these completed transactions. We've accomplished a great deal in just four years. And every day that goes by, we make additional strides towards our goal of building the premier global advisory firm. This progress is buttressed by an unwavering commitment to continued and purposeful investment in all aspects of our business. We completed our most successful recruiting year-to-date, adding talent at all levels. Since October 1, 2015, we have more than doubled our headcount and now have 678 employees, including 81 partners. In growing our firm, we have maintained an incredibly high standard for talent while enhancing our culture of collaboration and inclusion. We continue to broaden and deepen our industry and product capabilities, enabling us to deliver a broader suite of advisory services to a growing roster of clients around the world. One recent example is our partnership with NASDAQ private market. This partnership combines the capabilities of PJT Park Hills leading secondary advisory business with NASDAQ's best-in-class technology platform to offer clients superior transaction execution. We have also committed additional resources to PJT CamberView, our industry-leading corporate governance advisory business. This has further enhanced our ability to advise Boards and management teams around the globe on shareholder advisory, corporate governance, ESG and activism matters. These and other investments across all of our businesses have resulted in higher win rates and increased market shares. Now turning to each of our businesses in more detail. Beginning with restructuring. Our world-class restructuring franchise maintained its leadership position, ranking No. 1 globally in dollar value of announced and completed restructurings. The business meaningfully exceeded our initial revenue expectations for 2019, powered by substantial growth in U.S. restructuring revenues. This was the result of ongoing distress in certain industries as well as closer collaboration between our bankers and strategic advisory and restructuring. The outlook for our restructuring business continues to be positive, given the increase in mandated backlog relative to a year ago. Turning to PJT Park Hill. PJT Park Hill, our leading fundraising business, delivered a second straight year of record results as each of the business verticals experienced year-over-year growth. PJT Park Hill continues to benefit from greater collaboration across the firm and is expected to deliver a third straight year of record results. Turning to Strategic Advisory. In Strategic Advisory, we saw significant growth in 2019 revenues compared to the prior year as we continue to realize the financial benefits of our sustained investment in the business. 2019 was a year in which our progress became increasingly visible as reflected in our roster of announced and completed M&A transactions as well as the increased contribution of Strategic Advisory to firm-wide results. As this success becomes clearer, we have seen an increased number of talented bankers wanting to join our platform. We ended 2019 with 45 Strategic Advisory partners, and our recruiting pipeline remains robust. I will now turn the call over to Helen to review our financial results.

Thank you, Paul. Good morning. Beginning with revenues. Total revenues for 2019 was $718 million, up $137 million or 24% year-over-year. Adjusting our 2018 results for a full year of CamberView, revenues increased 17% year-over-year. The breakdown of revenues. Advisory revenues were $572 million, up 27% year-over-year with the increase driven by significantly higher Strategic Advisory and Secondary Advisory fees. Placement revenues were $133 million, up 20% year-over-year reflecting an increase in private placement activity for corporate clients as well as higher revenues across the PJT Park Hill fundraising businesses. For the fourth quarter, total revenues of $249 million, up 42% year-over-year. This is the highest revenue quarter in the company's history. A breakdown of the revenues in the quarter. Advisory revenues were $188 million, up 42% year-over-year reflecting significant increases in Strategic Advisory, Restructuring and Secondary Advisory. Placement revenues of $56 million, up 44% compared with the same period last year, driven by higher fundraising revenues in PJT Park Hill. Turning to expenses. Consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments, including adjustments related to the CamberView acquisition. These adjustments are not more fully described in our 8-K. First, adjusted compensation expense. Full year compensation expense was $460 million, 64.1% of revenues and consistent with ratio we accrued through the first three quarters of the year. Turning to adjusted non-compensation expense. Total non-compensation expense for 2019 was $125 million, up 15% year-over-year and for the fourth quarter, $33 million, up 11%. The year-over-year growth reflected increased business activity and headcount, we also invested an additional space in both London and the U.S., resulting in a 16% year-over-year increase in occupancy costs. With this additional investment in real estate, we expect to be able to increase headcount meaningfully before acquiring additional space in our current locations. As a percentage of revenues, our non-comp expense was 17.4% for the full year 2019, down from 18.8% in 2018. While we expect increased non-compensation expense in 2020 due to continued investment in infrastructure as well as increased business activity levels, we expect to realize additional operating leverage as our revenue growth outpaces the increase in non-comps. Turning to adjusted pretax income. We reported adjusted pretax income of $132.3 million for the full year 2019 and $55.5 million in the fourth quarter. Our adjusted pretax margin was 18.4% for the full year, up from 17.1% in 2018 and 22.3% in the fourth quarter, up from 18.8% in the fourth quarter 2018. The provision for taxes. As of prior years, we 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 year at a value higher than our amortized cost. With those adjustments, our full year effective tax rate was 25.5%. In 2020, we would expect our effective tax rate to be in the range of 25% to 27%. Earnings per share. Our adjusted if-converted earnings per share was $2.41 for the full year, up 26% and $1.02 in the fourth quarter, up 70%. The share count. For the year ending 2019, our weighted average share count was 41 million shares up just over 2% versus full year 2018. Consistent with our capital priorities, we will continue to focus on investing in the business, but also use excess cash to reduce the dilutive impact of this investment, while also being mindful of our flows. For the full year 2019, we repurchased the equivalent of approximately 1.9 million shares through a combination of open market repurchases, exchanges of partnership units for cash and net share settlements. During the fourth quarter, we received notices to exchange approximately 227,000 partnership units as in prior quarters, we've elected to exchange these units for cash, which will settle next week. On the balance sheet, we ended the year with approximately $217 million in cash and short-term investments and $212 million in net working capital. We also ended the year with $21.5 million in funded debt, which we have subsequently repaid a year ahead of schedule, and we extended our line of credit, which remains undrawn. The Board has approved a dividend of $0.05 per share. The dividend will be paid on March 18 to Class A common shareholders of record on March 4. I’ll now turn back to Paul.

Thank you, Helen. While we've had much to celebrate, we are deeply saddened by the passing of two individuals who left an indelible mark on our firm. Our partner, Dan Prendergast and our senior adviser, former NBA Commissioner, David Stern. Dan Prendergast, co-Founder of Park Hill will be remembered as an inspirational leader, a pioneering entrepreneur and a beloved colleague. Dan's stewardship of Park Hill was marked by integrity and soft-spoken leadership. PJT Park Hill will forever benefit from his legacy of excellence and commitment to clients. David Stern joined PJT as a senior adviser, just as we were starting out, and we were honored to have him as a mentor. He challenged us to dream big dreams while maintaining focus on even the smallest detail. David infused respect and human connection into everything he did. His sense of humor, warmth and joyful spirit will be very much missed. The contribution of these extraordinary colleagues has enabled us to come a long way in a short period of time. Now turning to our outlook. Since our debut, we have made substantial investments in our Strategic Advisory business as well as our other leading businesses. As we sit here today, all our businesses are significantly larger than they were in 2015. While Strategic Advisory is now our largest and fastest-growing business, this year, all of our other businesses combined will still account for more than 50% of firm-wide revenues. Each of our businesses has meaningful opportunities for growth, and we will continue to invest in these businesses to realize that growth. We have always said that we are built to grow in most any market environment. And while we have an uncertain view of the macro M&A environment for 2020, we are confident in our ability to grow our pretax income this year by more than 20% driven by continued revenue growth and further margin improvement. And with that, we will now take your questions.

[Operator Instructions] We will begin with Devin Ryan with JMP Securities.

Hi, great. Good morning Paul, Helen and Sharon how are you?

Very well, good morning.

Good morning. First of all, appreciate just, on the commentary you just made on the outlook. That's helpful. I guess the first question I always like the slide in the presentation that shows the Strategic Advisory partners and kind of how that's been trending and those that are at the firm or have been at the firm for over two years. That number of, call it, partners that have been in the firm for two plus years, is up 30% at the end of 2019 from 2018, but it's still only two thirds of the overall partner base. So there's still big runway there. So I guess I'm just trying to think about that third piece of the partners that have not been at the firm for two years, kind of expectations for ramping, what your experience has been? Is two years kind of the right time frame? And so essentially, there's very little contribution. And over the course of two years, are kind of getting to a full ramp. I'm just trying to get some context here because it is such a large percentage that has increased from the end of 2019 – or end of 2018? And then also, there's still market percentage that's still not been in the firm for three years and so I'm just trying to get some perspective of what you've actually experienced with your partners ramping the contribution? Because it's a helpful narrative and slide that I think more context would be helpful.

Sure. Well, a couple of things, Devin. First of all, if you look at where we sit at the end of the year, it's 45 Strategic Advisory partners, of which a third have been on the platform for less than two years. But that one third percentage is going to grow during the year as we continue to onboard other partners to our firm. So we're going to end up with this continuously evolving mix of term – of individuals who have been on the platform for an extended period of time, and those who are new to it. I think we've always made the point that this is more art than science, and it's not as if three years at a day in, some partner is somehow magically fully immersed in all of the opportunity and potential that they can ultimately deliver on. We view this as a continuum. There's no doubt that individuals who have been on the platform, three or four years are more productive than individuals who are here for a year or two. We had always made the delineation of three years because in our experience, it's unrealistic to expect any meaningful revenue contribution in the first 24 months. The individuals who join our firm have almost instantaneous impact. So we see the impact, we see the client connectivity, we see the momentum, we see the introduction to boardrooms and C-suite dialogues almost immediately in many instances, but just the way this business works, because it's a long sales cycle business. And because there's a long period of time between awarded mandate, potential announcement of a mandate and completion that you need to, at a minimum, sort of bifurcate three years plus and three years minus. But I don't want to get overly invested in this as the predictive model for our firm because we've always maintained that if we get up and running for a number of years, the brand itself matures. We get more opportunities, more looks at business because clients are coming to us with their situation. So our cost of sale goes down, our brand recognition goes up, our win rates go up. And it's not just the contribution of an individual, it's also what the firm stands for and the firm's track record. And as all of this matures, we think there's tremendous runway and opportunity ahead of us.

I appreciate that, Paul. Maybe a follow-up on the restructuring business. You heard kind of the commentary there that you're seeing improvement in activity from a year ago. But it sounds like you saw kind of a nice acceleration in business throughout 2019, so that contributed to the strong overall year. And so I'm curious if that trend that maybe started to develop towards the middle of the year or later in the year, if you're holding pace off of that, is it accelerating? Just any more context there in terms of how the trajectory of that business looks, given that it seems it did kind of improve throughout the year?

Yes. I think if we rewind the tape, Devin, I believe we talked a year ago about the fact that at the end of 2018 coming into 2019, we began to see an increase in mandates. And what we said was that if that increase in mandates persisted for some period of time, and it wasn't just a flash but it was sort of a steady acceleration that we would grow increasingly constructive on our prospects for 2019. And I think as we gave you the quarter-by-quarter narrative as more and more of what we saw late in 2018 and early in 2019 persisted, our commentary became increasingly optimistic. And as we look at the totality of 2019, we ended with a meaningfully higher level of activity than we had forecast a year prior. And I think as I mentioned in my remarks a few moments ago, our mandated backlog today is higher than it was a year ago, and we feel very good about our prospects for continued growth in our restructuring business, in 2020.

Okay, terrific. Just last one. I heard Helen's remarks around you expecting operating margin expansion. And just trying to think about the operating leverage from here, you had a nice improvement in 2019. Clearly, the platform is maturing. Revenues are growing. And so curious what you're expecting or seeing kind of incremental margins at the moment and just expectations on kind of the trajectory of that from here as the platform matures?

Look, I think we've said from the beginning that we have a tremendous amount of operating leverage in this business. And that as we get out of the heavy investment phase into a more moderate investment phase, and more importantly, as the investments that we've made consistently over the past four-plus years start to bear fruit, that it'll be evidenced in our financial results, then you'll see ever-increasing margin improvement until we get to some steady state. We saw a fair bit of that in 2019. We expect more of that in 2020. And I think I, again, referenced that we see continued revenue growth, further margin expansion in 2020, and we look forward to delivering on that.

All right. Terrific. Well, congratulations on a nice year and I look forward to 2020.

Thank you.

Thank you.

Now we'll take a question from Richard Ramsden with Goldman Sachs.

Hey, Paul and Helen. How are you doing?

Fine. Good morning.

Fine.

So perhaps I can ask the question on operating leverage a little bit differently. So you saw, I think, about 130 basis points of margin expansion in 2019. If we just assume similar organic revenue growth of around, let's say, 15% to 20%, do you think that the improvement in margin will be linear from here? Or do you think we should assume that the benefits of scale are going to start to lead to more of an exponential margin improvement for 2020 and maybe 2021?

I'll try first on a question. At this point, we have not yet provided guidance on the comp accrual, which we'll do when we report our first quarter results. But one of the many factors that's going to impact our margin is going to be the level of investment that we're going to make. So that's something we're going to determine. We do believe that as we look at our non-comps as we've said, when we look at the components of our non-comps and the portion of fixed cost, we think the fixed cost was going to grow in the single-digit range and the variable cost is likely to grow closer to our revenue growth. And with that, we expect our revenues to outpace our non-comp growth. So that we believe will provide significant operating leverage.

I mean Richard, just to come at it from a slightly different vantage point. We are confident that the investments we've made will lead to continued revenue growth. That revenue growth is going to outpace the growth in our expense base, which is going to create further operating leverage, and we're still in the early days of seeing all of that come to fruition. But ultimately, what you're asking is what's the slope of the revenue curve but that's really what drives all of this margin improvement. And we feel very comfortable that we're on the right path. We've been on the right path for four-plus years. We feel very comfortable about our prospects for 2020. But at the end of the day, it's really when those revenues hit, how quickly they hit, that ultimately creates the margin. Margin is an output, it's not an input. The inputs are, we have growing revenues, and we have growing but at a meaningfully lower growth rate expenses, and that's what creates the operating leverage. And as we said from the beginning, if we ever get to steady state because we're such a growing dynamic organization, our overall margins will settle in to a range. But for now, we think there's plenty of operating leverage to be had. But Helen has very diligently put together a cost structure in our firm that provides for significant operating leverage because we've made heavy investments. Our incremental expense, a lot of it is fixed, that which is variable is likely to grow at rates less than our revenue growth. And at the end of the day, it's just when the revenues hit in, as you know, the further out I look, the more confident I get, I have far more visibility in my own mind on what our firm looks like in two or three years than I do in two or three quarters. But we're clearly on the right track, and we feel very good about our ability to continue to drive shareholder value.

Okay. That's very helpful. Okay. But perhaps I can just ask another question on the environment. So we obviously heard from a number of your peers, there does seem to be a much more constructive view on Europe today, do you share in that view? And can you talk a little bit about whether or not you've seen any shift between strategic and financial sponsor activity as you look at the backlogs heading into 2020?

Well, we've consistently said that notwithstanding the Brexit overhang, we did not see the dimunition in activity in our business. We continue to see the same thing. So maybe we're not changing our view. Maybe we've just been more mind-numbingly consistent in our view, which is that Europe will continue to be an important part because it's such a large part of the global economy. And so much of Europe, the companies there are multinationals that do business around the globe, and we sometimes focus too much on where companies are domiciled as opposed to where they do business. And if you look at companies that do business, you have a lot of U.S. companies that – by that definition are as much European as they are U.S. companies. And we've always said that over time, we believe there is a secular shift to more M&A. What we've also said is that there is a cyclical element to it. And as I said a few moments ago, we have an uncertain view of the 2020 macro environment for a variety of reasons, but that really does nothing to dampen our confidence in our own prospects for 2020 and beyond because we continue to gain mind share, we continue to gain market share. And with sponsors, it's not just how much money you have as dry powder, it's also where valuations are. So in an interesting way, if valuations remain elevated, I don't know how much of that dry powder is going to be deployed. Now, do I think it's a safety net, if valuations come down meaningfully, if they lag down and others are not prepared to commit significant capital? Do I think sponsors will fill that void? I do. But that's different than necessarily believing that there's going to be somehow a big upturn in sponsor activity in 2020 just because they've raised funds.

Okay. Thanks. That’s very helpful.

Thank you, Richard.

We'll now take a question from Jim Mitchell with Buckingham Research.

Hey, good morning. Paul, maybe this is a bit of a high-quality problem, but if you look at the cash levels, you're double – over double a year ago, you paid down debt – down, you sound pretty confident that pretax income is going to grow pretty healthily, so cash flow will grow pretty healthily as well. So when – what's the right level to think about where maybe you start thinking about being a little more aggressive with capital turn, whether – and how do you think about is it more special dividends or buybacks? Or how do you think about that?

Well, I appreciate the question. If you look at our cash position at the end of 2018, we kept it very tight because we wanted to give up as little of our equity as possible in pursuing the CamberView acquisition because we're very confident in our own prospects, and we view our currency as incredibly highly valued. And as a result, we spent 2019 replenishing it. And now we have a more comfortable cash position, I believe, than we've ever had in our short history. Having said that, you need to look at that cash number and then you need to look at the comp payable line, which reflects the compensation paid after the year, and then you also have to take into account the debt that was paid off, which Helen has referenced. I think there's no doubt that whatever that number is, is not only very comfortable, but that number should grow consistently throughout the year. Our priority has always been to try and minimize dilution. I think if you look at the growth or lack thereof and fully diluted shares or weighted average shares, we've been good stewards of our shareholders' capital, and we'll continue to do that, but also be mindful of the float. So maybe that's a better question to ask us at the end of 2020 than at the beginning of 2020.

All right. Fair enough. We'll have to wait. Maybe just talking about the placement business. After a number of years, sort of before the combination, there wasn't a lot of growth there, but it seems to have really picked up and accelerated as you kind of meld everything together. Can you talk a little bit about, maybe give a little more color on what's driving that pickup? Is it cyclical? Or is it things you're doing to kind of cross-sell and leverage that platform? And how much more is there to grow that business?

Well, we've always said that the Park Hill business is a jewel business. It's a jewel of a business, and it fits incredibly well inside our other businesses and holistically, the more ways we can touch clients, the more ways we can provide tailored solutions, the more ways we can provide insights, that has more value to clients. So we find ourselves winning more, and we find ourselves being able to add value would be compensated for that. And we feel good about our continued growth prospects in that business. I don't think the growth prospects can rival what we see on the Strategic Advisory side just because of the sheer quantum of investment and the still very low market shares we have in Strategic Advisory but we're quite pleased that the investments that have been made, have begun to pay off, and we see continued opportunity for growth in that business.

All right. Well, thanks for answering my questions.

Thank you.

And our final question will come from the line of Sumeet Mody with Piper Sandler.

Thanks. Good morning, guys. I know we've talked about in the past about elevated hiring until you reach around that kind of 50 or 60 partner count in Strategic Advisory. It seems like you guys should maybe approach that in the next year or two. So how are you thinking about growth levels from here? Is it still a fair way to look at the expansion before you're maybe reassessing that growth rate?

I think we've always said that the number of hires is going to be a function of the individuals that we have the opportunity to attract to the platform. And that will dictate our hiring. And I think as we mentioned earlier, we have incredibly high standards in terms of the talent and the maintenance or enhancement of our culture. So we set very high bars. And to the extent that there are high-quality individuals who meet all of our hiring criteria. And we believe we can continue to earn significant returns by growing either an existing vertical or entering a new vertical, we're going to do that. And ultimately, we're going to take what the marketplace provides us in terms of opportunities. And to date, we found that our story resonates incredibly well. And as long as it continues to resonate and as long as the clients increasingly want to do business with our firm, then we're going to continue to grow. But we're not managing to numbers there, we're managing to quality. So we have a very qualitatively defined criteria, which then creates a quantitative result. So we know what the person needs to look like. And depending upon how many of those, we have the opportunity to attract to the platform, there's just a higher-end result. But if you asked me, do I think that we're likely to stop attracting talent to our platform? I don't, because if anything, the individuals who want to talk to us, grow each quarter, each year that the vision of this firm becomes better understood in the marketplace, the more we become the destination for talent. And if we have an opportunity to add quality individuals without compromising any of our very high standards, we're going to continue to drive growth.

Got it. Thanks, Paul. And then, I guess, a follow-up there. Where are you seeing kind of the most opportunity for some of that new business? I mean maybe between geographically product or sector over the next few years? I know you got a small presence in Europe. But do you see some opportunity elsewhere in the world, perhaps, Asia, is that viewed more of an opportunity maybe then further product diversification in the U.S.? Just wanted to get your thoughts on that.

Well, first of all, it's a global business. We are a global firm. We do business around the globe. And being a global firm is really defined by your capabilities to do business anywhere in the world and clients' willingness to do business with you regardless of their headquarters, their country of domicile. And in that regard, we currently do business with nearly – I think companies who are in nearly 50 countries around the globe. At the right time, if we found – again, it goes back to individuals. If we found the right individuals in the right regions of the globe to help create a beachhead for us, we would make further investment in those areas. But we are a global firm. And now the question is, we want to make further investment, that is going to be defined less by how attractive a market is, and more by how attractive the individuals who can lead that effort in that market are.

Great. Thank you.

Thank you very much. I think that concludes today's call. We appreciate everyone for joining us this morning, and we look forward to speaking to you one quarter from now. Thank you very much.