Perella Weinberg Partners

Good morning and welcome to the Cruella Weinberg Partners second quarter 2022 earnings conference call. Currently, all callers have been placed in a listen-only mode. And following management's prepared remarks, the call will be opened up for your questions. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you need to remove yourself from the queue, press star 2. Anytime, if you should need operator assistance, press star zero. Please be advised that today's call is being recorded. I will now turn the call over to Taylor Reinhart, head of investor relations. You may begin.

Thank you, Operator, and welcome to our second quarter 2022 earnings call. Joining me today are Peter Weinberg, Chief Executive Officer, and Gary Brancic, Chief Financial Officer. A replay of this call will be available through the investor's page of the company's website approximately two hours following the conclusion of this live broadcast through August 11, 2022. For those of you listening to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, August 4, 2022, 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 filings for discussion of certain of these risks and uncertainties. The 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 affecting the financial performance of the business. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8K, which can be found on the company's website. I will now send the call over to Peter Weinberg to discuss our results.

Thank you, Taylor. Good morning, and thank you all for joining us on our second quarter 2022 earnings call. Before I give some color on our financial performance, on the occasion of being public for just over a year, I wanted to put into context our aspiration and journey to become the leading global independent advisory firm. When we first approached the public market investors in the fall of 2020, we articulated a very precise vision for our firm, to grow our leading independent advisory franchise by broadening and deepening client relationships, by expanding the suite of our advisory services, and by adding best-in-class talent to the team. We saw an enormous market opportunity, and we felt the firm was exceptionally well-positioned to capitalize upon it. our pursuit of that goal would remain undaunted in booming operating environments and in stressed economic times. Well, we've tested the bookends of those extremes in our public life. In 2021, global M&A volume was at a record $5.8 trillion. Our revenues were up over 50%, and our earnings were up over four times the prior period. In 2022, we're facing very stressed macroeconomic and geopolitical conditions without any clear indication of improvement in the near term. Our mindset in this volatile and challenging environment is that the opportunity for our firm is greater even than it would have been in more stable and robust economic environments. we're focused on leaning into this market, investing and capitalizing intelligently so that when the clouds eventually part, our positioning is only strengthened. We continue to attract great talent to the firm from universities all the way up to partner. Particularly with senior bankers, we're finding our access and yield has never been higher. Since 2020, we've added 16 advisory partners, In 2022 so far, we've promoted three advisory partners from within the firm and another five have either joined or agreed to join the firm. Every one of these additions were in high activity industry subsectors and product areas that we had strategically targeted years ago, including private capital placement and capital structure solutions. Looking forward, we continue to have a clear roadmap of where and when we want to grow to meet our mission. Strategic dialogue with our clients around the world has remained extremely active, yet transaction announcement and closing timelines are elongated compared to prior periods. The number of new clients retaining our services remains robust, and we are continuing to see high levels of engagement across our platform. There has been an understandable increase in focus from the investment community on the timing of a pickup and restructuring activity and the potential contribution of this revenue stream. Today, even more so than three months ago, we're seeing the combination of inflation, rising rates, and supply chain issues putting pressure on balance sheets and causing increased demand for liability management services. While liability management and restructuring mandates and fee events can take time to materialize, we are seeing an increase in these conversations, which we believe may contribute favorably to our 2023 results. This environment also creates opportunities for the firm as we return capital to shareholders. Year to date, in addition to the funding of our quarterly dividend, we have bought back 15% of our total Class A common shares outstanding, based on our March 31st, 2022 basic share count via open market repurchases and net settled shares to satisfy employee tax obligations in lieu of share issuances upon vesting of equity grants. Collectively, we've returned nearly $70 million in capital. Additionally, we announced the commencement of an exchange offer for our warrants into common shares. Gary will go into more detail on these matters in a minute. Turning to the quarter, this morning we reported second quarter revenues of $151 million, about flat with our first quarter results. Our second quarter revenues turned out to be well higher than we had anticipated on our first quarter earnings call. I would characterize this improvement as primarily due to timing. We currently expect revenues for the back half of the year to be relatively in line with our first half results, but transaction timing and changes in market conditions could impact this expectation in either direction. To wrap up, we believe we are on a path of sustained long-term growth and are continuing to invest in our future by expanding our capabilities and reach. Periods of more muted M&A activity have allowed us the opportunity to aggressively invest in talent, and we expect to take advantage of today's market and use it as an accelerant to grow our market share and scale. We believe the opportunities in front of us are enormous and will provide many years of future growth potential. On that note, Gary, I'll turn it over to you.

Thank you, Peter. As Peter mentioned, revenues for the second quarter totaled $151 million, a decrease of 41% from the prior year period. Our first half revenues were $303 million, a decrease of 29% from the prior year. Our prior period results presented us with challenging comparisons with record-setting performance in the second quarter of 2021, driven by an elevated level of large fee transactions. The year-over-year decline for both periods was driven by a reduction in activity across the platform, particularly in mergers and acquisition advice, relative to record 2021 results. Our second quarter and first half saw fewer advisory transaction completions and a decrease in average fee size per client. Our second quarter results included a recognized revenue amount of $8 million from a transaction that closed at the start of the third quarter, in line with relevant accounting policies. This compares to $17 million, which was similarly recognized in the prior year period. The first quarter period did not include any transaction fee revenue from closings early in the second quarter of 2022. My following comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of the business. Our GAAP measures and a reconciliation of GAAP to adjusted results can be found in our earnings press release, which is on our website. On the expense side, in the second quarter, we accrued adjusted compensation expense of 64% of revenues. We'll continue to evaluate the business environment as the year progresses, but expect that our full year adjusted compensation expense margin will be in line with our prior medium-term guidance of the mid-60s ratio. Our adjusted non-compensation expense was $31 million for the second quarter, up 4% year over year, although down 4% quarter over quarter, and represented 21% of our revenues. We currently expect our full year 2022 non-compensation expense, exclusive of travels, meals, and entertainment, to be in the range of $120 to $125 million, which is below our previous estimate. We saw T&E pick up a bit in the second quarter to just over $1.2 million per month. And while this level may be more representative of the new normal, it still remains about 25% below our pre-COVID 2019 average run rate of $1.6 million per month. As discussed on prior calls, lease expirations, combined with our significant recent and anticipated growth, has necessitated adding space in both our London and New York headquarters. These two real estate projects will provide an increase of nearly 20% over the amount of space currently occupied by PWP's advisory businesses in those cities. Despite us taking on this additional space, our run rate gap lease expense per square foot will be significantly less under the new leases than under the old leases. In the near term, we will incur some one-time accounting double rent related to the new leases in both locations. In London, we plan to relocate to a new building in early 2023 and expect to incur $1.5 million in double rent for accounting purposes for the period July 2022 through January 2023. New York, we are expanding our space in our current building and expect to complete renovations in September 2023. In this location, we expect to incur $5.4 million in double rent for accounting purposes for the period September 2022 through September 2023. Firms out-of-pocket build-out costs related to these headquarters are expected to be in excess of $50 million, further mitigated by over $20 million in free rent. We reported adjusted operating income of $23 million in the second quarter and an adjusted operating margin of 15.4%. Our adjusted non-operating income of $5 million for the second quarter and $7 million for the first half included approximately $4 million and $5 million, respectively, of net gains related to FX revaluation and realizations. The majority of this income resulted from our foreign subsidiaries holding dollar-denominated cash and net intercompany receivables, while the dollar strengthened significantly during the period. Because our consolidated financials are reported in dollars, we don't believe that these types of FX gains or losses on dollar-denominated financial assets of our foreign subsidiaries have economic substance to our consolidated business. Just-in-net income totaled $23 million for the second quarter. Our adjusted, if converted, net income for the second quarter was $20 million and presents our results as if all partnership units had converted to shares of common stocks. Adjusted, diluted, if converted, net income per Class A share was $0.22 for the three months ended June 30, 2022. For the year-to-date period, our adjusted, as if converted, tax rate was approximately 29%, moderately below our rate in the first quarter. Our asset converted tax rate is a theoretical figure as it is computed ignoring certain gap items excluded in our adjusted reporting, which may have positive or negative tax attributes. In addition, it assumes all partnership units were exchanged for shares of the company's Class A common stock, resulting in all the company's income being subject to corporate level tax. Peter mentioned in his remarks, in 2020, we laid out a very clear vision for the firm. An important component of that vision was the intention that over the long term we would return significant capital to our shareholders. The recent environment has provided a very attractive opportunity to return capital through share repurchases as well as dividends. As such, year to date, we've returned nearly $70 million through the repurchase of more than 7 million shares in the open market. The net settlement of over 600,000 shares to satisfy tax obligations in lieu of share and the payment of $13 million in pro rata distributions to limited partners, which allowed PWP to pay its dividends of $6.6 million. To date, we've utilized approximately 50% of our $100 million repurchase authorization, which commenced at the end of March. Board has declared a quarterly dividend of 7 cents per share payable on September 12th, 2022 to holders of record as of September 2nd, 2022. As of June 30, 2022, we held $265 million of cash, cash equivalents, and short-term investments in U.S. Treasury securities, no debt, and had an undrawn revolving credit facility. Finally, on July 22, we announced the commencement of an exchange offer and consent solicitation related to our outstanding warrant. We're offering to all warrant holders the opportunity to receive 0.2 shares of Class A common stock in exchange for each warrant tendered and exchanged. If 100% of the 7.8 million warrants outstanding were to be elected for exchange at this ratio, we would issue about 1.6 million shares of Class A common stock to satisfy the exchange. The tender offer is set to expire on August 18, 2022. Before we open the line for questions, let me turn the call back over to Peter.

Gary, thank you. I would just conclude by saying that these are tough days for our industry, for our clients, and for many people around the world. We believe our business model and our firm will sustain in any economic environment and we are steadfast in our commitment to provide long-term growth. Operator, we can now open it up for questions.

At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. We'll take our first question from Devin Ryan with JMP Securities.

Good morning, Peter and Gary. How are you? Good, Devin. Good morning. um appreciate the outlook particularly for the back half of the year um from the outside what we're tracking you know that the pipeline looks like um you know hanging in pretty well maybe even growing a bit um but at the same time we are hearing from a lot of your peers about the elongation of just timing of deals kind of moving through pipeline and closing so question is you know if you can just touch on how you would actually characterize the pipeline itself um and then interrelated you know you think about the back half Does that imply the elongation theme continues, gets worse? And are there any maybe early green sheets that the market could be moving into a better balance as well?

Sure. So I would say from an overall perspective that I am enthusiastic about our sector and our firm in the intermediate and longer term, but really remain cautious in the short term. We are still not out of the woods yet by any means with respect to this environment. As you all know well, we have higher cost of capital now in the system, both on the credit side and the equity side. Volatility, uncertainty has shaken confidence really all caused by macroeconomic factors. Having said that, I do feel there are some positives. As you rightly point out, our pipeline is only slightly below where it was last year. Our backlog is materially lower. And that really encapsulates the environment we're in to the extent that we're all very busy, but it takes longer and it's tougher to close transactions. I would also add that the intent of our clients has not changed. In other words, a good idea last year remains a good idea today. It just may be more complex to execute. And the other force that we're seeing is, and I've seen this in many other crises that I've been in over the years, is that activity is really being driven by the very strong who feel that they can capitalize upon their strength to achieve certain strategic objectives, or the very weak who are forced into executing transactions really as a matter of survival. So that's what we see for the rest of the year.

Okay, terrific. Thanks for the call, Peter. And then maybe there's one for Gary on share purchases. I think people are very pleased to see how aggressive the company's been leaning in, particularly in this environment and share price. If the stock remains, I'll call it in a similar ballpark. Could we see a similar pace to the first half of the year continue on what purchase is? And, you know, just how are you thinking about capacity beyond this first $100 million, just considering some of the other moving parts you've highlighted, like the space build-out? The flip side is you're still generating very strong cash flow even in this environment. Thank you.

Yeah, thank you, Devin. Look, our commitment to returning excess capital to shareholders over the long term is obviously core to our strategy. That said, we really don't comment on the specific cadence of the anticipated repurchases going forward or potential changes that our board may want to approve in terms of future increases to the current program. I will say and kind of reiterate that the environment, as you mentioned, was quite attractive for share repurchases in the quarter. not only due to where the stock price was that we think is a very attractive purchase point, but also just that we had relatively high trading volume in the quarter, which we think was largely driven by folks who were – some of our shareholders, particularly hedge fund shareholders, who were exiting. And so that provided an opportunity in the quarter as well. You know, we have repurchased, as Peter mentioned, about 15% of our Class A common, so we're kind of mindful of liquidity as well. And so those are all considerations that, as we think about the future, we'll keep in mind.

Okay, perfect. I'll leave it there. Thanks, guys. Thank you.

We'll take our next question from Richard Ramsden with Goldman Sachs.

Good morning, Peter and Gary. So, Peter, maybe you can just talk a little bit about the relative engagement from corporates versus financial sponsors and how that's evolved over the course of the year and what you're expecting in the second half. And I'm particularly interested in how you're thinking about the change in financing conditions for those two client subsegments and how you think that's going to impact activity as you think about the next six months. Thanks.

Sure. So with respect to sponsors, let's not forget that there's, you know, $1.5 to $2 trillion of dry powder out there, which at the moment is very much on the sidelines, but it's certainly not going away. I had actually felt a couple of months ago that the decrease in valuations would outweigh the increase in the cost of credit. and that activity would result. That really has not been the case yet with respect to initiation. There's still a lot of activity in the sponsor ecosystem, but it's not as much on new deals. We believe that equilibrium will at some point reach the marketplace and transactions will occur. We're still in that uncomfortable phase of it's difficult to achieve a price discovery. The financing conditions are, there's enormous financing capacity in the market. It's just, and right now, it has a lower risk tolerance. So we think that that market is kind of a coiled spring, but it's unclear when it will kind of take effect. And that's our experience in the market so far as it relates to sponsors.

Okay, that's helpful. And then maybe as a follow-up, are the more difficult financing conditions helping the capital advisory business? Maybe you could talk a little bit about the dynamics within that business, and is the growth rate in that business different to what you would have thought three or six months ago?

Yes, that theme that you identify is absolutely evident in our business. I mean we really look at our debt advisory and capital solutions business sort of under one umbrella. And whether that's in the restructuring space or advising companies on issuing credit or, you know, advising on equity. And so it is more active now because that topic is very much a strategic topic with almost all our clients right now. And that is different than it was, I would say, six months ago and has indeed increased the dialogue on that subject with our clients.

Okay, that's very helpful. Thanks a lot.

We'll take our next question from Steven Chewbacca with Wolf Research.

Hey, good morning, Peter. Good morning, Gary. Good morning, Steven. Maybe a somewhat more nuanced question just on the advisory outlook by geography. Certainly, especially in light of this morning's announcement at the U.K., reinforcing just elevated recession risk. It feels like that's a broader concern as it relates to Europe. You do have a pretty strong franchise in the region. I was hoping you could just provide some context as to how you're thinking about the advisory outlook across the different geographies.

Sure. So Europe right now is really kind of a tale of two cities. You know, on one hand, it's a perfect storm. The war in Ukraine, enormous disruption in the energy complex, very high stress in sovereign budgets and sovereign debt levels. And add to that all the things that we're dealing with here in terms of the recession, inflation, supply chain, everything else. So on one hand, it's kind of a perfect storm over there. On the other hand, and this has been a very interesting development for us, which is that there are areas of urgency which propel activity in Europe. You'll notice that the numbers, I don't want to over-interpret July, but the July M&A numbers in the whole market in Europe are actually quite a bit more attractive than the U.S., And we believe that's due to the areas of urgency which are propelling activity. For example, energy transition, whether it's renewables or energy tech or hydrogen or electronic or EV infrastructure, that is propelling activity. Also, large companies looking to raise capital who may not be able to raise it in the financial markets are selling assets, often in the infrastructure space. Europe is behind in consolidation, telecom, banks, et cetera. And there's a much higher level of startups in fintech and mobility and healthcare. So it's an interesting market where there are plenty of concerns, as you rightly point out, but there's also another side of the story, and that's keeping us busy over there.

Thanks for that, Collar. And for my follow-up, Peter, you had mentioned that you're looking to take advantage of some of the recent disruption and investment opportunities that might be emerging. I was hoping you could provide some context as to what level of gross partner ads we should be contemplating and whether you can sustain a 64% comp accrual while leaning into some of those investment opportunities, given the more challenging revenue backdrop you cited.

Yeah. So this year, just a level set, we have either elevated or hired or have agreed to hire eight partners. Three are promoted from within the firm, and five are either here or have agreed to join. Last year, the apples to apples number to eight was 10. We elevated three partners internally and hired seven. And, you know, we're not finished in the year yet. Of course, we're only in August. We definitely have our eye on a very specific growth plan in the firm. It's the same plan that we articulated when we entered the public market. And we will continue to hire partners. We feel that they are open to conversations almost without exception. And we think there's still an enormous supply of bankers who will enter the independent space, whether it's us or someone else. So that's our plan. our strategy is very much to grow to the hiring of partners, and we will continue to do that.

Yeah, and Peter, I just add on comp margin, you know, as you saw, we've continued to accrue for the year at 64%. That's sort of our best estimate as of today. I think our view for the year is we're still quite comfortable with our medium-term guidance, which is a mid-60s comp ratio, and we're not going to get more specific in that right now, but that's really kind of the state of where we see things today.

Thanks so much for taking my questions. Thank you, Steve.

We'll take our next question from Michael Brown with KBW.

Hi, good morning.

Good morning.

So, Peter, I appreciate the commentary on the restructuring business and the latest trend that you're seeing there and, you know, that there's a potential for some pickup in 2023. Can you just talk about the size of that restructuring and advisory business, either in terms of the revenue contribution or the dedicated partner headcount for that business? We're trying to think about what that potential lift could be next year.

Well, to answer your specific question, we have seven partners in our restructuring business, and we have a broader set of partners in our overall capital solutions business, which really covers the broad topic of credit advice with respect to our clients. I will just make a comment on the restructuring opportunity and elaborate a bit on what I said a minute ago. Right now, the stressed companies are still benefiting from the capital that was available to them last year and before. But the reason that we're positive ultimately on the restructuring opportunity is because, you know, right now the high yield index is 300 or so basis points higher than it was. But for even more stressed companies, so say triple C companies, interest rates are two times what they were. So that's going to cause a challenge, particularly when you look at maturities coming forward of both high-yield bonds and leveraged loans, which in the next three years is almost $700 billion. And so We feel that our firm is well positioned for that. As I said, it's not going to happen tomorrow because of the capital that was raised last year and before, but we do believe it's coming.

The one thing I might add to that, Peter, is I think our visibility on that isn't tremendous right now. In other words, because a lot of these companies have a little bit of that breathing room that Peter just alluded to, if there's a pretty material improvement in rates and in the environment in the meantime, that obviously could work the other way in terms of resurgence and activity next year. You know, we're in a very volatile environment, and so I think how large a contributor restructuring ends up being next year is going to be, you know, obviously it's going to be very dependent on what happens in the environment in the interim.

I guess if you had to frame it maybe historically, and I understand your business has been evolving quite a lot over the last few years, but if you could frame it historically, I guess what has been a rough contribution and then When you're thinking about the restructuring outlook here, is there any additional color on where you're seeing some of that opportunity? I'm sure it's across sectors, but is it potentially going to pick up more in Europe first and then the U.S.? Any view on the rest of the world here? Any additional color would be helpful.

So we don't disclose, as you know, the contribution of our restructuring business or our credit advisory business to the total. But what I will say is that if you look at the market and you look at the industries that are most represented in the distressed category, so I believe that approximately half of all triple C credits and leverage loans trading at less than 80 are in the TMT space, the healthcare space, and the industrial space in that order. And so, you know, that's as good a proxy as any as to the areas of activity and the restructuring space going forward.

Thanks, Peter. Very, very interesting. Maybe just one clarification for Gary. The Second half guidance on the revenues, is it fair to expect that that's a bit more fourth quarter weighted, just given the seasonality of advisory typically?

You know, I think, look, as you've seen from this recent quarter, the ability to predict revenue timing quarter to quarter is just not great. So I'm not going to go out on a limb and tell you what I think the allocation is going to be between Q3 and Q4.

Okay. Understood. Thank you for taking my question. Thank you.

This concludes the Q&A portion of today's call. I would now like to turn the call back over to Peter Weinberg for any additional or closing remarks.

Great. Thanks, operator. Thank you, everybody, for joining the call. We appreciate it. Please feel free to follow up with our team. And we look forward to chatting with you at the next quarter.

This concludes the Perrella Weinberg Partners second quarter 2022 earnings call and webcast. You may disconnect your line at this time and have a wonderful day.