Perella Weinberg Partners

Thank you for standing by. This is the conference operator. Welcome to the Perella Weinberg Partners second quarter 2021 earnings call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Taylor Reinhart, Investor Relations. Please go ahead.

Thank you, Operator, and welcome to our second quarter 2021 earnings call. Joining me today are Peter Weinberg, Chief Executive Officer, and Gary Barancic, Chief Financial Officer. A replay of this call will be available through the Investors page of the company's website approximately two hours following the conclusion of this live broadcast through August 26, 2021. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, August 12, 2021, and have not been updated subsequent to the initial earnings call. Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP's expectations of future financial and business performance and conditions and industry outlook. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions, that could cause actual results to differ materially from those discussed in the forward-looking statements and are not guarantees of future events or performance. Please refer to PWP's most recent SEC filing for discussion of certain of these risks in the city. Forward-looking statements are based on our current beliefs and expectations, and the firm undertakes no obligation to update any forward-looking statements. During the call, there will also be a discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. PWP has reconciled these items to the most comparable gap measures in the press release filed with today's Form 8K, which can be found on the company's website. I will now turn the call over to Peter Weinberg to discuss the results.

Great. Thank you, Taylor. Good morning, everybody, and thank you for joining us for our first earnings call as a public company. Before I begin my formal remarks, I wanted to briefly recognize those who contributed to our journey as a private partnership over the past 15 years, and also to welcome our new constituents as a public company. Many people contributed to what the firm is today, but none more than our team we have in the field right now. At all levels of the firm, I am enormously grateful for their dedication and commitment. And to the investors and analysts whom I know we will get to know quite well, Welcome. I frequently say within the firm that when we became a public company, we crossed the starting line. We will work hard to make the next 15 years as rewarding as the first 15. Now, onto my formal remarks regarding our quarter. While Gary will get into more financial detail in a minute, I am pleased to report that our firm in 2021 had a record second quarter and a record first half. Revenues for the quarter were $256 million and revenues for the first half were $425 million, resulting in a 123% increase and a 105% increase versus the respective prior period in 2020. The firm's business was active across all industry groups, geographies, and product areas. The dynamics that led to increased M&A activity in the latter half of 2020 have continued to pace in 2021. We are seeing an unprecedented level of strategic dialogue and transaction flow. And while we are cognizant of a number of market concerns, including the indigestion in the SPAC market, new antitrust regulatory developments, tax policy and inflation risk, the level of market activity continues to be very strong. While our backlog remains extremely robust, we would be cautious about simply extrapolating our record first half performance for the balance of the year. We saw an elevated level of large fee realizations in the second quarter, which made this a particularly strong quarter. Our restructuring and liability management business experienced moderate growth in the quarter relative to record levels in the back half of 2020. Overall activity in this business has been tempered by low interest rates and the wide availability of inexpensive capital. Our restructuring team has been able to pivot and focus on other corporate finance related mandates, a benefit of our flexible client-centric model. In terms of our growth through the expansion of our partner base, year to date we have added three partners from internal promotions and another six have joined or agreed to join the firm in 2021. We believe this group will add significantly to our capability and footprint, and we expect to announce more partner hires this summer and fall. We continue to see significant opportunities for growth across our platform and a plentiful supply of candidates who we believe fit not only our strategic needs, but our culture as well. So to wrap up, we feel very good about the momentum we continue to experience in the second quarter. Looking forward, we have the tailwinds of an extraordinarily active advisory market in which we operate and a strong brand presence in the industry. We believe we have a very simple, clear, client-centric growth strategy in which to operate as a public company. On that note, Gary, I'll turn it over to you.

Thank you, Peter. For our first earnings call as a public company, and given many of the accounting complexities of the transaction in our up-seas structure, I'm going to be a little more granular in my remarks today than I likely will be on future calls. As Peter mentioned, we generated $256 million of revenues for the second quarter, an increase of 123% over the prior year period. Our first half revenues were $425 million, an increase of 105% from the prior year. Adjusted net income totaled $62 million for the second quarter and $93 million for the first half of the year. Reported gap net income per share on both a basic and diluted basis of minus 29 cents a share and minus 32 cents a share, respectively, for both the second quarter and first six months of 2021 reflect only the post-transaction period of June 25th to June 30th. Adjusted net income per share has not been presented for the three months or six months ended June 30, 2021, as it really isn't meaningful given the limited post-transaction period during which earnings per share is calculated. although we expect to provide that on a go-forward basis. I'll also note that our reported adjusted net income for these periods does not adjust for corporate taxes on an as-if converted basis due to the limited six-day period post-transaction. However, in future periods, we intend to show adjusted net income reflecting taxes as if all partnership units had been converted to shares of Class A common stock. As Peter mentioned in his remarks, we continue to see high levels of activity across substantially all service line sectors and geographies, particularly in mergers and acquisitions advice. The increase in revenue can be attributed to both an increase in the number of advisory transaction completions and the average fee per client as compared to the same periods in 2020. On the expense side, we present our expenses with certain non-GAAP adjustments which are more fully described in our press release file this morning. In the second quarter, we accrued adjusted compensation expense at 64% of revenues in line with our previously communicated medium-term guidance. This is 1,100 basis points lower than our adjusted comp ratio for the second quarter of 2020 when we operated as a private partnership. Our GAAP compensation expense includes stock-based compensation expense related to amortization of certain partnership units, which has no economic impact on PWP and therefore has been allocated to non-controlling interests. On August 3rd, 2021, The Compensation Committee of the Board of Directors approved certain previously announced transaction-related incentive compensation awards in the form of Restricted Stock Units, RSUs, that will be granted pursuant to the Perella-Weinberg Partners 2021 Omnibus Incentive Plan. From the Transaction Pool Share Reserve, 10.2 million RSUs will be granted and 9.5 million RSUs will be granted to certain members of management and certain other partners from the General Share Reserve. Of these 19.7 million RSUs, 12.7 million are going to be subject to market price-based vesting in addition to service-based vesting. Further details will be provided in our second quarter 10-Q. Such expenses relating to either amortization of partnership units or to certain transaction-related RSUs has been or will be excluded from our adjusted compensation expense while stock-based compensation expense relating to future RSU issuances as a component of ongoing compensation will generally be included in our adjusted compensation expense. Our adjusted non-compensation expense for the second quarter was $30 million compared to $26.4 million for the same period a year ago. As a percentage of revenues, our adjusted non-compensation expense was 11.7% for the second quarter, down significantly from 23% in the same period last year. This increase in the absolute dollar amount of non-compensation expense on an adjusted basis was primarily driven by an increase in professional fees related to recruiting and co-advisory fees and technology expense, as well as a small pickup in travel and entertainment related expenses relative to the low levels experienced in the second quarter of last year. For reference, for the second quarter of 2021, our travel and related expenses were $1.2 million compared to $661,000 the first quarter of 2021 and $19.7 million for the full year 2019. For the balance of 2021, we expect that our adjusted non-compensation expense could be approximately 25 to 30 percent higher than the $54.5 million recorded in the first half of the year. This is due to several factors, including increased public company costs, including D&O insurance, and temporarily higher legal and tax professional fees to support our transition to a public company, timing relative to certain IT projects, and professional development expenses, as well as some very modest assumed increases in travel for the balance of the year. In connection with the transaction, we paid off all of our existing debt and incurred a one-time charge of $39.4 million associated with that retirement, which is reflected in our second quarter gap, non-operating income, but is excluded from our adjusted results. Turning to the balance sheet, as of June 30, 2021, we had $349.7 million of cash and cash equivalents, no debt, and an undrawn revolving credit facility. The Board declared a Class A common stock dividend of 7 cents a share payable on September 21, 2021, to holders of record as of September 3, 2021. In addition, on August 3rd, 2021, the company exercised its sponsor share repurchase right of 1 million shares at a price of $12 per share, which is outlined in our proxy statement. Over time, we expect to return excess cash to shareholders through a combination of share repurchases and dividends. Prior to the close of the business combination transaction on June 24th, all of our operating income and taxes relating to that income were derived from the predecessor PWP entity. Pre-transaction income has been allocated to non-controlling interest. Corporate taxes have been applied to PWP's GAAP financials post-transaction close and only with respect to the public company's share of allocated income from PWP holdings. With that, we'll now turn the call back to the operator to open the line for questions. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question is from Devin Ryan from JMP Securities. Please go ahead.

Great. Good morning, Peter and Gary. Congratulations on the transaction and welcome to the public markets.

Thank you, Devin. Good morning.

Good morning. I guess first question here, starting there, oftentimes when companies, advisory firms, move into the public markets, post-IPO, you tend to see kind of a jolt in the business, whether it be from the brand recognition and the momentum that you get, and that can obviously help business, but also on the recruiting front. And I'm just curious kind of what you guys, you've been through the process through the SPAC and now into the public markets. If there's any anecdotes you can share around momentum that you would maybe say is related or feels like a catalyst. And also on the recruiting side, you're clearly already tracking ahead of the five kind of external partner recruits and just how you guys are feeling about that level as we look forward. Thanks.

Thanks, Devin. So firstly, I would just say that our being a public company is really just a part of our capital structure. And so we've had a very specific plan and a long-term plan on growing the firm. And to that extent, really not much has changed in terms of our ambitions and our plans and how we really operate the business. To your point, I will say that business being public and the process of becoming public has been helpful to our brand more broadly. And also one of the reasons that we did go public is to be able to grow the firm really more efficiency through using our public currency.

Okay, perfect.

And then maybe just a follow-up here. Clearly, the balance sheet is in a great position. Can you just update us on capital management strategy, how you're thinking about managing potential dilution from performance shares that could enter the share account from the SPAC transaction over time?

Yeah, Devin, I can take that question. As we said before, we anticipate the business will continue as it is now and will continue to generate excess cash flow that we would anticipate returning to shareholders. I think our first priority and preference would be to do that through repurchases over the medium and long term to moderate that dilution. But I also see us doing specials potentially from time to time, in part because our partnership structure, our upseat partnership structure, It requires tax distributions, which could cause tax to build up at the Pubco level. So I really see it kind of as a mix of the two over time, and we'll kind of evaluate from time to time, you know, which is most appropriate.

Okay, terrific. I'll leave it there. Thanks very much. Thanks, Evan. Thank you.

The next question is from Michael Brown from KBW. Please go ahead.

Hey, good morning, guys, and congrats to joining the public markets. Thanks, Michael. Good morning. Good morning. So I wanted to start with a little bit more on some of your forward commentary and maybe dive in a little bit deeper there. I think when I look at your mix versus some of the peers, Europe is a large piece, and energy is also a strong vertical for you. So I was hoping to hear a little bit about how activity has been performing there and what's your expectations. And as you think about the Delta variant and its impact outside of the U.S. and in the U.S. as well, how has that been impacting any new business activity or is just the strength of the market continuing to kind of push through any headwinds there? Thank you.

Michael, we would say that the market remains very, very strong in spite of the headwinds that I mentioned earlier. And we really haven't seen any activity restraint as a result of some of those headwinds, including the variant at least so far. With respect to the two areas that you mentioned, Europe for one, You know, our European business is a bit different from others in the sense that we started our business there 15 years ago at the same time we started the firm, and we really have built our business sort of in parallel. And we've been fortunate to be involved in some very large transactions this year. Europe is year-to-date operating at a record level, and last year was a record also. And while the US will outpace Europe in terms of overall activity, Europe still remains very active and we've been very focused on that and some of our recruiting activity has occurred there as well. The energy sector is a very important sector for us. Any area where there's significant change and significant technological disruption, and complexity are areas where we often find significant opportunities, and energy would certainly be that. It's been very busy for us. Last year was very busy in the restructuring area, a little bit less so this year in that space, but still active across the board.

Okay, great, appreciate the color there.

Gary, you know, You spoke a little bit about the RSUs there, and that was helpful color. Could you maybe put a finer point on the share count that we should really be thinking about here from a modeling perspective as we get to the third quarter, your first quarter as a publicly traded company? And as we think about the adjusted EPS specifically, what is kind of the right denominator there for EPS? Obviously, this puts and takes, but just is the 94 million diluted share count that you used for GAAP the right jumping off point?

Well, yes, it's the right jumping off point, but that number is obviously going to evolve. And as you get into the third quarter, a couple of things. First, As you heard earlier, we just exercised the $1 million sponsor share repurchase option, so that takes the share countdown by a million versus what was true at the end of June, at the end of the second quarter. And then going forward, we will have a couple other elements. One, there's potential treasury stock dilution of the warrants, and some of that is in, and I believe it's less than a million shares, is in the fully diluted share count for the end of the second quarter. So that's a second component. And then with respect to our RSUs, on a fully diluted share basis, there will be some impact of that, again, on a treasury stock basis over time, which will hit our fully diluted share count. Importantly, a large percentage of those RSUs have market-based targets. And I think, as you know, even on the fully diluted share count, those shares will not come into the fully-deleted share count until those performance targets are met.

Sounds like the details on that are going to come out in the queue, but if you could just give us a quick preview, perhaps, what's the first market-based price threshold that will need to be reached for those RSUs?

Yeah, so it's different depending upon the type of RSUs. So, The transaction pool RSUs have a number of hurdles, which I don't want to sort of risk misstating here by just giving a list here on the phone, but those are all detailed in the proxy. And the hurdles, the performance hurdles there are different than for the management RSUs. For the management RSUs that we just announced and the form of the agreement will be attached as an exhibit to our upcoming queue, there the thresholds actually start at a $15 stock price and go up to $20, $25, and $30. So those thresholds are overall higher than the previously disclosed transaction pool PSU grants that we had mentioned before.

Okay, great. I'm looking forward to seeing that detail in the queue, and thanks for the color. I will leave it there. Thank you. No problem. Thanks, Michael.

Thank you, Mike. The next question is from Stephen Chuback from Wolf Research. Please go ahead.

Good morning, guys. This is Brendan O'Brien filling in for Stephen. Hey, good morning, Brendan. Morning.

So, yes, first, there's been a lot of discussion around sponsors and the elevated level of activity so far this year with a number of your peers suggesting that activity is in a period of secular growth. How do you think your position competitively relative to peers in both the U.S. as well as Europe? Are there any areas that you look to invest? And also, if you can maybe provide some color as to how large your sponsor practice is and how big of a contribution it was to your revenues in the latest quarter.

So we look at the sponsor opportunity as large and growing. And we see it really in kind of four areas. One is the sponsors themselves, which are, of course, in their own right, very large, sophisticated financial institutions. We also work, obviously, as sponsors invest in new companies. We work with their portfolio companies and provide other advisory services. We don't look at sponsors as a sector. and they're more ubiquitous within our business model. Literally every partner who covers an industry subsector, a region, or a product area has relationships with sponsors that are active in those areas. And while our history is to work with large corporates, working with sponsors is absolutely critical to our market knowledge and remains an enormous opportunity that we're very committed to really across the firm.

That's a great color.

I guess next, we've had a lot of success winning SPAC business so far this year, but as you know, there's some concern around the ability of SPACs to find targets given the significant amount of capital chasing deals. I was hoping you could provide your thoughts on the sustainability of the SPAC market overall and the ability of SPACs to find targets given your success

unique experience, I guess, within the space.

I view SPACs to be a very positive factor in the capital markets today and believe that they are here to stay. On one hand, they're not new, but they are now a much more credible choice to an IPO or a direct listing than even a few years ago. As you rightly say, SPACs have been a very positive thing for our firm. We obviously did want to get to the place we are now, talking with you all. We advise clients both on the sell side and the buy side, and also our sponsor ourselves, as we have been years ago. There is indigestion in the SPAC market that comes in two areas. One is just supply. There are 400 SPACs out there with $130 billion in trust and more on the way. And there's been some indigestion with respect to the pipe market, and that's just more supply than the market can probably accommodate. There's also regulation, which frankly is not all bad. Both the SEC is focused on this, and we believe Europe will be as well. And that hopefully will level the playing field between IPOs and SPACs in a number of different respects. But I would say overall that SPACs are a very good mechanism to become public. It's a great option for many companies, and I think there's some very good sponsors out there and some very good de-SPACing ideas that will continue in that market going forward.

Great. Thank you for taking my questions, and congratulations on becoming a public company.

Thanks, Brennan.

As a reminder, it is star one to ask a question. The next question is from Ken Worthington from JP Morgan. Please go ahead.

Hi, good morning. Thank you for taking my questions. Maybe first, can we talk a bit about Tudor Pickering? How is it performing in this environment? And to what extent is energy advisory sort of keeping up with the strength that you're seeing in some of your other financial sectors? And then are there any themes that are more prominent in energy which PWP and Tudor Pickering are advising on?

Our Tudor Pickering Holt business is a very important part of our firm. And there's been a lot of attention on the energy sector. And I would say that our activity is really coming in two places. One is the traditional activity. activity in the space, which continues. Even though we're all talking about a non-carbon world many years from now, it's a very important reality today, and there are transactions and advisory assignments that result from that. But there's also a lot of attention on energy tech and the movement to change that industry, and we're very involved in that as well. The business is active. We're busy in that area, and we're excited about a lot of the initiatives that we're undertaking in that business.

Okay, great. Thank you. And maybe to flesh out the comments earlier on the non-comp, the 25% to 30% increase, you mentioned D&O, professional fees, some very modest travel. As we think about that bump in the second half of the year, What portion of that is permanent versus what portion is temporary? It seemed like the comments about professional fees may have been for more of a temporary increase where the D&O side seems to be more permanent, and so maybe just start there.

Yeah, Ken, I think you've characterized it correctly. There are some different dynamics which kind of extend for some different timeframes. So some elements of professional fees are relatively short-term in duration as we just get some extra help in the first couple of quarters of when we're a public company on various tax and legal matters. The D&O insurance piece is elevated in large part not just because the D&O market has become more expensive but because our premiums as a recent D-SPAC increase are much higher than if we, you know, if we were, you know, a seasoned public company. And those will come down over time, we expect, but not, you know, not in the next couple of quarters, obviously. And then, you know, and then sort of offsetting that, obviously, the T&E side of things is going to pick up. You know, we're not, we don't have a crystal ball. We're not sure exactly the time and pace of that, but that'll, you know, that will offset everything. So, you know, you've got a number of different factors, kind of some working in opposite directions, which will impact the non-comp going forward.

And if travel were completely normal today, given, you know, the hiring that you've done, what would be a normal either annual or quarterly T&E cost? Like just help us try to gauge what a more normal environment would look like in terms of adding costs there? Because I think you characterized the second half of the year, a modest increase, but when that goes back to normal, what sort of a bump should we kind of contemplate?

Well, you know, the old normal for T&E, for our business, with headcount that wasn't too dissimilar, a little bit lower than today, but not massively so, The old normal was about $20 million a year in T&E cost. The new normal, it's as difficult for us to predict as anybody else. I think our expectation is that it will certainly be much more elevated than it is today. Face-to-face meetings are always going to be a critical part of our client-centric business model. That being said, I think we also see that the new normal may not be quite at the level of travel as before as we and our clients have become sort of more accustomed to virtual meetings and so forth. So I think generally speaking, the levels should be approaching what they were historically on a per head basis, but probably not get there all the way.

Great. Thank you very much.

Sure. This concludes the question and answer session. I would like to turn the conference back over to Taylor Reinhardt for closing remarks.

Thank you, operator, and thank you, everyone, for joining us. If you have any additional questions, please feel free to follow up with us.

Thanks very much, everybody.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.