Perella Weinberg Partners

Good morning and welcome to the Perella Weinberg Partners First Quarter 2023 Earnings Conference Call. During today's discussion, all callers will be placed in a listen-only mode. And following management's prepared remarks, the conference call will be open for questions from the research community. This conference call is being recorded. At this time, I'd like to turn the conference over to Taylor Reinhart, Head of Investor Relations. Please go ahead.

Thank you, Operator, and welcome to our First Quarter 2023 Earnings Call. Joining me today are Andrew Bednar, Chief Executive Officer, and Gary Brancic, Chief Financial Officer. The replay of this call will be available through the Investors page on the company's website approximately two hours following the conclusion of this live broadcast through May 11, 2023. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 4, 2023, 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 risk, uncertainties, and assumptions that could cause actual results to differ materially from those discussed in the forward-looking statement 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 and incidences. 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 assessing the financial performance of the business. EWC has reconciled these items to the most comparable FAT measures in the press release files with today's Form 8K, which can be found on the company's website. I will now turn the call over to Andrew Bednar to discuss our results.

Thank you, Taylor, and good morning. Today we reported first quarter revenues of $131 million, down 13% from a year ago. And that's against the challenging operating environment for the traditional M&A business. During the quarter, we continued to see longer transaction timelines and a more tentative transaction environment generally, and as a result, recorded fewer fees related to large-scale transactions. Geographically, our revenues skewed even more towards the U.S., though still within the range of our historical split between the United States and Europe. Across our platform, healthcare and financials and technology continue to be active, as well as energy and infrastructure. Although mandates in our financing and capital solutions business are up meaningfully versus last year, driven by traditional restructuring, fees attributable to our financing and capital solutions business this quarter were down year over year, largely the result of a sizable restructuring transaction in Q1-22, which made for a difficult comparison. In our capital markets advisory business, we are now experiencing the lag effect from Fed policy decisions as market conditions worsened in 22 and remain challenging in this quarter. And in private capital markets specifically, we are still seeing a process of resetting of valuation expectations by both companies and investors, which has slowed the pace of closings. Looking at the border market, new uncertainty was ushered in with the bank failures and forced merger this spring that shook global markets, and importantly for our business, has affected CEO confidence. With less urgency and conviction in the boardroom relating to traditional M&A, we witnessed a number of deals expected to announce or close in Q1 get pushed to Q2 and beyond, contributing to the elongated transaction timelines across our platform that I mentioned earlier. Continued lack of economic clarity, a broad range of uncertainty, and the related market instability affect confidence, and perhaps as important, affect conviction. And these conditions are likely to adversely influence deal timing going forward. Notwithstanding these current conditions, we are playing the long game, and our focus remains the same, to scale our business. And here at PWP, we spend time on what we can control, getting even closer to our clients in challenging times, capitalizing on an attractive recruiting environment to build our coverage teams, and always remaining vigilant about our expense base. With all our efforts, we continue to position PWP for market-leading growth opportunity ahead. With a mission to scale our business, we are strategically investing in talent to increase our client footprint. Recruiting conditions have improved materially this year compared to prior periods. We added five senior bankers, three partners, and two MVs in key strategic coverage areas, and all are expected to join the firm in the coming months. Given where we are in our lifecycle, our platform offers a unique value proposition to experienced hires, and our recruiting pipeline remains very robust. Importantly, we continue to grow organically as well. Year-to-date, we promoted two partners and six managing directors in our advisory business. We are a small firm with a big brand, and the value outside is enclosing that gap. So we will continue expanding our industry reach and breadth of product capabilities while always doing what we do best, providing world-class advice to our clients. The firm was built to weather cycles and indeed to take advantage of cycles like this. So we are encouraged by the opportunity in front of us right now to grow our footprint. I want to take a moment to recognize the PWP team for their continued hard work and commitment to our mission. Across our 10 offices in five countries, our team stayed focused on our clients, helped scale the business, and collaborated effectively to deliver market-leading results in this quarter in very difficult conditions. Thank you, team. Gary, I will now turn the call over to you to discuss our results in more detail.

Thank you, Andrew. As Andrew already spoke to top-line performance in his remarks, I'll begin with a review of our expenses. In the first quarter, we accrued adjusted compensation expense at 65% of revenues, keeping within our median term mid-60s guidance range and below our full year 2022 expense accrual level. This compensation margin was set based on assumptions at quarter end, and our accrual could be revised as the year progresses based on business conditions, the pace we bring senior talent to our platform, and year-end industry compensation levels. Our adjusted non-compensation expense was $35 million for the first quarter, up 7% both year-over-year and quarter-over-quarter, and largely driven by an increase in travel and related expenses and overlapping rents. For the full year, we continue to expect growth in the non-comp spend of 15% to 20% over 2022, with overlapping rents in New York into the fourth quarter and a related step-up in depreciation expense tied to our new headquarters projects, potential legal expenses, increased travel and entertainment expense, continued investment in technology, and some inflationary pressures overall contributing to the increase. The expected growth in non-comp expense in 2023 includes some one-time items, for example, overlapping rent, and is not representative of a go-forward growth rate for this cost base. We continue to look for opportunities to rationalize expenses. In this more challenging environment, we manage our expenses tightly and may elect to eliminate or defer certain expenditures as we progress through the year. For the first quarter, we reported adjusted operating income of $11.5 million and an adjusted operating income margin of 9%. Adjusted net income and adjusted if converted net income totaled $10 million and $8 million, respectively. Adjusted if converted earnings was 9 cents during the same period. We continue to generate strong cash flow and Our original buyback authorization still has approximately $10 million in capacity remaining, and we have our second $100 million authorization bid. Additionally, this morning, we declared a quarterly dividend of $0.07 per share. With that, we'll now turn the call back to the operator to open the line for questions.

Thank you. 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.

Hey, good morning, Andrew and Gary. How are you?

Very good. Hi, Devin.

Hi. First question, just wanted to touch on the recruiting environment. Andrew, you talked about it being very attractive. Right now we're hearing that from others as well. And so just want to talk about kind of the expectation there and then the interplay with the comp ratio because the comp ratio obviously was set kind of in the normal target range in the first quarter. But just curious kind of you know, maybe where that could evolve to the extent you really want to lean into this recruiting environment this year. You know, do you expect to do that? And then, you know, maybe, you know, how far would you allow that cop ratio to migrate higher to the extent we're in a, you know, call it once-in-a-decade type of recruiting environment? Thanks.

Yeah, thanks, Devin. I think that's well said. It is a once-in-a-decade recruiting environment. I think the last time we saw this was probably in the 08, 09 timeframe. So, yeah, We are leaning in for sure. We've shown that already, and we continue to be very, very active on recruiting. And I think we're seeing just the quality of candidates and also matching up very well to our strategic ambitions, which are all around increasing our client footprint. So we're very, very excited about the environment. I think in terms of comp margin, it's early in the year. So I think we last year took up our margin as we headed into the fourth quarter. I think number one is that it's just early in the year to make a forecast regarding where we're going to end up. But secondly, I've always tried to explain that part of our comp margin is CapEx. And so we're all well aware that from an accounting perspective, it ends up in the P&L. But the way we look at the business, part of our comp margin is CapEx. It takes, you know, more than a year, probably on average two-plus years for, you know, our new hires to ramp up and actually begin producing revenue. And so, you know, we have sort of a two-plus-year capex cycle for all of our hires, and the time to really deploy capital is is in usually depressed markets as the one that we're experiencing now. So you're necessarily going to have a bit of a mismatch in the timing of when you deploy that capital for new hires and when you're going to see the return. So we are definitely leaning in. I think it's early on forecasting where the common margin will end up, but we are investing in this cycle and we think we're going to be rewarded for that as we head into 24 and beyond.

Okay, terrific. Just follow up here just on the environment and, you know, appreciate, you know, this kind of macro uncertainty is just continuing that elongation theme that we've been hearing about for really the past year here. So maybe just to dig in a little more on that, if it's possible just to give any more information Qualification or quantification around the level of dialogue with clients. Have we made progress? I appreciate the crystal ball is tough from here, but have we made progress over the past quarter or two? And you've also added a lot of bankers, as you mentioned, Andrew, over the past few years. So, just that kind of balance between new bankers coming online and maybe starting to contribute for the first time versus just this macro theme of still very challenging out there. Thanks.

Yeah, the macro is challenging. There's no question about that. I think most of us in the industry felt better coming into January and February. I think March was a setback. And you know, as I said in my commentary, that it really ushered in a new element of uncertainty. And I think most of our clients are just seeing mixed signals. And so, you know, we operate the business in 5P industries, and we're a very client-centric coverage model. And so we don't sell products to clients. We help clients solve problems. And right now, a lot of the problems for our clients are around financing, capital structure. And so our Our capital solutions team and liability management restructuring teams are very busy. Those mandates are up for sure. Traditional M&A is flat in terms of number of engagements for us, but we do have a very active dialogue, particularly among our most healthy clients that have strong balance sheets that are looking to make strategic moves where they've got a differentiated advantage. versus other strategics that may need financing, and versus private equity, which continues to remain quite inactive relative to prior periods. So we're very busy. I think it speaks to the strength of our brand and the quality of our teams. We've made very strategic investments around our energy transition team and our infrastructure team. We've just made recent investments around technology and business services. And we think those are very, very target-rich environments for future M&A activities. So we feel good about the positioning. But right now, there's no question, there's just a macro headwind for all of us.

Yeah, understood. Okay, I'll leave it there. But thanks very much. Thanks, Devin.

Thank you. Our next question will come from James Yarrow with Goldman Sachs.

Good morning, and thanks for taking my questions. I just wanted to get your thoughts on the recent bank stress. And I'd be curious, you know, you talked about impacting the March events, impacting the near term, but maybe just your longer-term views on how this could affect the M&A business as well as the restructuring business. You know, regional banks obviously did participate in a lot of syndicated financings, so I would imagine that there could be some longer-term ramifications as well.

Yeah, thanks, James. I think in the moment, the biggest impact from all the banking situations that we saw through March and now into April and May is just the clients and boards, to the extent they're contemplating significant transactions, just have a moment of pause. And so I think it hits confidence in the first instance. But it's not going to affect the long-term planning for our clients. So I believe that the banking stress and the recent action around regional banks is unlikely to have a long-term impact on our clients' confidence and conviction to move forward on larger-scale M&A transactions. Where I do think it has an impact is just in credit. Credit conditions have clearly tightened. Credit's more expensive and less available. Traditional banks continue to do less of what traditional banks used to do. That's been a 20-year trend where there's just been disintermediation of traditional money center banks, but now also a pulling back of traditional credit extension. A lot of that's been picked up by the private credit community and the non-bank lenders, that trend is actually a very significant driver of activity for our business. I think our industry and the advisory-focused firms will benefit from the trends in private credit. So we're quite encouraged by that dislocation and continued disintermediation.

Okay, that's very helpful. Maybe if we just turn to restructuring, you know, recession odds have clearly – increase, I think, among forecasters in recent weeks. Maybe you just talk to the backdrop that you're seeing for restructuring at this point, and then how much of this you would expect to impact this year versus 2024 and beyond.

Yeah, so as I said in the commentary and a moment ago, there's a clear, clear increase in our liability management and restructuring mandates. There's no question about that. There are a lot of stressed companies I think it's not as broad-based as we've seen in prior cycles. So I think it's so far quite selective, but it is quite active relative to a year ago without question. The decline in M&A is still showing counter-cyclicality with the restructuring business. So as M&A has fallen off, we've seen an increase in restructuring. The revenue curves are different, though. I think the decline in M&A has a pretty immediate impact on revenue, whereas the increase in restructuring, there's a lag effect in that curve. So I do think the revenue realization from today's increased activity in restructuring is likely to be realized as we head into Q3 and Q4 and into 24. So I think the counter-cyclicality is there. I think restructuring and financing is Advisory is a very strong ballast for our business, and that's very helpful. But I think the revenue effect is lagging, the decline in M&A, but we're going to see that positive impact in revenue as we head back half of the year. Okay, very clear. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from Stephen Tupac with Wolf Research.

Hi, good morning. Good morning. So, Andrew, I was hoping to follow up on just the latest remarks that you made about the expectation for some tailwinds potentially in the second half. Recognize that there are some closing delays, but just parsing some of the language in your prepared remarks, you alluded to restructuring and liability mandates being up meaningfully. Engagements on the M&A side are flat. If we start to see some of these revenue tailwinds materialize in the back half, is it reasonable to expect revenues to potentially even grow in 23 versus 22, even in the face of some of the macro headwinds you cited? Or are these tailwinds more of a 2024 story, just given the delays and closings that we've seen thus far?

Yeah, thanks, Stephen. I think it's really hard in our business to try to pinpoint the exact timing of when we have inflection points and when we have accelerants in our revenue progression. I do think that you need mandates to get revenue, so I think we have the indicia of future revenue in our system, but it's very, very hard to pinpoint exactly the timing. But I do think that the restructuring mandates we have will convert to revenue in I think we'll start to see that back half of this year. I think it will continue into 2024, but I'm not making any broad prediction about how much of an offset that is to declining M&A. And I think in M&A, while we're not completely tied to the broader market and we certainly aren't moving in lockstep with broad M&A trends with announcements down 48% and closings down 53%, we obviously have outperformed that market substantially. But we're still, you know, somewhat tied to it, and we do feel it in the M&A markets. I think we have to see an increase in announcement activity, and that's the harbinger to, you know, future closing revenue, which, as I said, we're definitely seeing elongated timelines, but we're not seeing much of a decline in overall activity. We're just not getting the announcement events that we were seeing last year and certainly in 2021.

Great. And just for my follow-up on capital management, you still appear to have plenty of excess liquidity at the moment, been relatively consistent with the buyback. Given some of the revenue uncertainty, but at the same time, the very attractive recruiting backdrop, just want to get a sense as to how we should be thinking about the magnitude or the cadence of buyback over the remainder of this year.

Yeah, Stephen, I'll take that. And, look, you're raising exactly kind of the right sort of considerations that we think about, right? Our balance sheet remains quite strong. We have a great cash position. We obviously have no debt. But we are in an environment where there is potentially very accretive CapEx opportunities, to use Andrew's words, going forward here. So it's really something we're going to monitor. We're not going to project that. future levels of buybacks, but we see it very much the same way. If there are more attractive opportunities to deploy capital than purchasing shares, we'll put it where the most attractive opportunities are.

Great. Thanks for taking my questions. Thanks.

Thank you. Our next question comes from Matt Moon with KBW.

Hi. Good morning. You cited Good morning. You cited some shifting of the geographic revenue contribution to the U.S. for this quarter. From the industry data, we can see it appears that the announcement picture and this phenomenon should at least continue near term, but kind of curious if there's any divergence from that scenario. industry-wide data in comparison to what PWP is seeing specifically and kind of any other general comments on the environment from, you know, the U.S. and Europe, the primary geographies would be great to hear.

Yeah, I think we're still kind of in our bands of mix between our U.S. business and our European business. And so I think that we're going to have some movements from our average from time to time, but generally we're still within the band of that mix. I'm not seeing anything that's structural or sort of permanent movement away from those traditional bands. I think our bankers on the ground in Europe report similar conditions as our bankers on the ground in the United States. They're active with their clients. As I said, we're a very client-centric model, so Our industry coverage teams are constantly with clients and serving their needs. A lot of those needs are around capital structure. And with respect to Europe versus U.S., again, I don't think there is much of a distinction. And companies continue to look for ways to optimize their portfolio, ways to grow. And so M&A dialogue continues to be very much a part of the corporate toolkit that people will think about, and that's the case in U.S. and Europe.

Right, and kind of sticking to the topic of different client bases, I just want to drill down on what you're seeing maybe between the difference in strategics versus sponsors. It seems in the sponsor community you're still seeing higher levels of degradation versus strategics, but On the other hand, it could also be quicker in the markets. So just kind of curious on, you know, what you're seeing and kind of the points that we need to see or the factors we need to see kind of turn for both of those communities.

Yeah. So I think you've seen the data as much as I do. So I think sponsor activity is down more than the broader market is down. So no question we're seeing a slower environment for the financial sponsor community. though they have an enormous amount of capital that will be deployed, we are still very optimistic that the private equity community will be very active, both in terms of buy sides and sell sides, but also in terms of their private credit businesses that will also need to deploy capital. As I mentioned earlier, that trend is a positive for our business. I think that you know, strategics have the advantage in a tougher credit market right now. We're still seeing a resetting and adjustment to tightening credit conditions. You know, we've had the 10th Fed move in a year as of yesterday. And once we have a full adjustment and a settling in, then I believe that private equity will reemerge as a very active participant in the M&A business. In 2006 and 2007, we had a similar move targeted Fed funds rate as where we are now in the five-plus zone, and we had an enormous amount of private equity activity. So I think we just have to get to, you know, full adjustment to a different credit environment, and I think that activity will resume, but we're still in the adjustment phase. Great. Thanks, guys. Thank you.

Thank you. We do have a follow-up question from Stephen Chubeck with Wolf Research.

Hi, thanks for indulging the follow-ups. Gary, I did want to ask about the non-comp growth trajectory. I recognize you're probably not ready to give 2024 guidance yet, but it does feel like there are a number of one-timers that are inflating the level of growth in 2023. Just want to think about how we should think about the normalized cadence in terms of non-comp growth. What's a reasonable expectation given some of the recruiting targets that you guys have outlined?

Yeah, Stephen, look, I think that, first of all, if you look at the non-concours this year and the increases, most of the items there are really also tied to investment in various ways. So we obviously have the two headquarters built out, which have some double rent in them, and we'll have some stepped-up depreciation this year as well as going forward. But, again, to reiterate, even though we've significantly increased our square footage in those two locations, our actual rent costs are actually coming down in the aggregate a bit, not a lot, but it's basically flat on much higher square footage. But that's been an investment to allow for future growth. Some of the other increases have been in the IT area, another area of growth for us. So, you know, but a bit of this this year is somewhat outsized. We aren't giving, you know, as you anticipated, guidance for 24. But as I kind of mentioned in my prepared remarks, the, you know, kind of the level that we see year over year isn't, you know, it isn't a level that we see sustainable, certainly, into next year and beyond. The other thing we are seeing, excuse me, and you've you can kind of see this in our numbers and our peers, is we are seeing T&E has really kind of come back to aggregate levels that are similar to what we saw in 2019, still below on a per head basis, but with a headcount growth that a lot of us have seen that's coming back. And that's a good thing for our business because it means our people are getting out in front of their clients more, but that is another form of investment.

Great. And just as it relates to the comp ratio issue, The comp accrual of 65%, encouraging to see that it's below the full year comp accrual in 22. Just want to understand what that's contemplating in terms of activity levels as well as recruitment. Is that 65% a reasonable baseline for us to be modeling for the full year 23 based on what you have visibility on today?

Yeah, Stephen, what I mentioned earlier is that it's a Q1 number based on what we were seeing in Q1. I think it's early to forecast where we're going to end up. And as I said earlier, any situation where you find us having an elevated comp margin is really about CapEx and not about steady state P&L item that you guys need to think about in terms of earnings power of the company. So again, I look at it as CapEx and we're too early in the year to suggest where we're going to be by the end of the year, other than to say, as I said earlier, we have a very attractive recruiting environment, and we're going to take advantage of that, not just to build numbers. That's not what we're about. We're building quality and people that fit with our strategic needs and desires, and we're finding very high-quality people to do that.

If I could just add to what Andrew said, as a technical accounting matter, 65% was our view of the full year as of March 31st. That was our best view as of that date. But to Andrew's point, it's very early in the year.

Great. Thanks for accommodating the follow-ups.

Yep.

Thank you. Thank you.

Thank you. This concludes the Q&A portion of today's call. I would like to now turn the conference back to Mr. Andrew Bednar for any additional or closing remarks.

Great. Thank you, everyone, for joining the call. We appreciate your continued support and interest in our firm and look forward to talking to everyone on our Q2 call in August. Thank you.

Thank you. This concludes the Perla Weinberg Partners First Quarter 2023 Earnings Call-In Webcast. You may disconnect your line.