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spk06: Good morning and welcome to the Piper Sandler Company's conference call to discuss the financial results for the second quarter of 2021. During the question and answer session, securities industry professionals may ask questions of management. The company has asked that I remind you that statements on this call that are not historical or current facts, including statements about beliefs and expectations are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's earnings release and reports on file with the SEC, which are available on the company's website at www.pipersambler.com and on the SEC website at www.pipersambler.com. This call will also include statements regarding certain NANGAP financial measures. The NANGAP measures should be considered in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. Please refer to the company's earnings release issued today for a reconciliation of this NANGAP financial measures to the most directly comparable GAAP measure. The earnings release is available on the investor relations page of the company's website and at the SEC website. As a reminder, this call is being recorded. And now, I'd like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.
spk03: Good morning, everyone. Thank you for joining the call to review our second quarter 2021 results. I am here with Deb Shoneman, our president, and Tim Carter, our CFO. We will go through our prepared remarks and then open up the call for questions. We delivered the fifth consecutive quarter of increased revenues, highlighting our momentum and demonstrating the earnings capacity of our business model. While we continue to experience strong client activity across our business segments, broad-based investment banking activities drove the increase in revenues during the second quarter. we generated adjusted net revenues of $493 million for the second quarter, a 27.7% operating margin, and adjusted EPS of $5.37, all quarterly records. For the first half of 2021, we recorded adjusted net revenues of $906 million, a 26.4% operating margin, and adjusted EPS of $9.51. Again, record-setting activity. The outlook for the second half of 2021 remains strong as our pipeline of deals is at peak levels. Our success is resonating with potential new partners, and we are continuing to pursue our growth initiatives. Turning to our corporate investment banking business, we generated total corporate investment banking revenues of $351 million in the second quarter of 2021. up 31% from the previous peak in the first quarter of this year. Performance in the quarter was strong across industry verticals and product offerings, highlighting the scale and diversification of our business. Our healthcare, financial services, and diversified industrials and services teams had terrific quarters. Highlights for the quarter included our healthcare franchise continues to produce very strong results with performance balanced in both advisory and equity financing during the quarter. The breadth of our financial services group was apparent with strong performance across subsectors, including depositories, insurance, real estate, and fintech. Further strengthening our non-depository sectors remains an area of focus and growth for us. Diversified Industrials and Services produced a record quarter driven by outstanding advisory activity, primarily with our private equity client base. We continue to invest in building our sector coverage within this group, and we currently have 70 investment banking professionals, including 12 MDs on the platform. Debt activity, both advisory and underwriting, continues to be strong. Our deep structuring expertise and strong distribution provide us with multiple ways to assist our clients. Collectively, these teams generated over $70 million of revenues for the quarter. And our restructuring business was further enhanced with the acquisition of TRS advisors, and the team is contributing in line with our expectations. During the quarter, M&A and restructuring activity generated 53% of total corporate investment banking revenues. Equity financings contributed 24%, and debt financing and capital advisory engagements produced 23% of revenues. We expect the mix of our corporate investment banking revenues to shift as our advisory pipeline builds and equity capital markets activity begins to moderate. Within corporate investment banking, our advisory services business generated record revenues of $249 million during the quarter. up 63% sequentially and 191% over the second quarter of last year. Our performance was strong both on an absolute and relative basis. We completed 58 M&A and restructuring transactions and 40 capital advisory deals during the second quarter. Our consistent focus and investments in people, industry coverage, and products for our investment banking business continue to drive new highs in our revenues. M&A activity was strong across industry verticals with high volumes and increased transaction sizes. Our average M&A fee has increased, reflecting our fee discipline and larger average transaction size as our brand continues to strengthen. As an example, our chemicals and materials team, which we added with the 2020 acquisition of Valence, has recently announced six deals with an aggregate transaction value of $14.5 billion. Ample availability of debt and equity, a favorable rate environment, strong business performance, and CEO confidence continue to drive strong M&A activity. The potential for tax law changes is an added catalyst and may pull forward activity into 2021. As a result, Our pipeline of deals is at record levels across most of our industry teams. We believe the M&A market is experiencing strong secular growth, and we are well positioned to benefit. Turning to corporate financing. During the second quarter of 2021, we generated 102 million of revenues and completed 67 equity, debt, and preferred financings, raising 24 billion in new capital, for our clients. With strong equity valuations, low interest rates, reduced market volatility, and high demand from investors, market conditions remained conducive for equity and debt capital raising during the quarter. Our healthcare team led the quarter, followed by financial services and technology. In healthcare, we continue to be a market leader where we ran the books on 22 of the 24 deals. we completed during the quarter. In financial services, we were particularly active in subordinated debt financing for community and regional banks, where we maintain over 50% market share based on deal value. Technology is an important area of growth for us, and we have made significant progress on increasing the number of book run deals and average fee size. It was an active quarter in terms of recruiting, and we finished the second quarter with 145 MDs in investment banking and capital markets, hiring five new managing directors to strengthen our presence in healthcare services, med tech, renewables and clean energy, oil field services and equipment, and industrial software and technology. Our success and momentum continue to resonate in the marketplace. Our strong performance during the second quarter of 2021 also resulted in corporate investment banking revenues crossing the $1 billion mark for the last 12-month period. Our people and expanding expertise makes us increasingly diverse and well positioned to take advantage of secular growth. We continue to expand our sector coverage, develop new product capabilities, increase market share, and add great talent to our platform. I would like to thank our team, for making Piper Sandler a leading brand and destination of choice for our clients. Now I will turn the call over to Deb.
spk01: Thanks, Chad. I'll begin with our equity brokerage business. For the second quarter of 2021, we generated equity brokerage revenues of $35 million, down 19% sequentially and 14% from the second quarter of last year. Equity markets saw reduced volatility and volumes during the second quarter. Market indices marched higher, driven by strengthening economic conditions and accommodative Federal Reserve policies, providing ample liquidity. We believe that current market valuations are muting trading activity and we expect revenues to continue near these levels in the third quarter. We remain focused on providing value-added research and premier execution capabilities. Specific to research, we continue to build out our industry coverage, which in 2021 included expanding our coverage of the technology sector. Based on our current roster of publishing analysts, we rank number one in terms of the number of SMID cap companies under coverage, and in total, we have over 950 stocks under coverage. Turning to municipal financing. For the second quarter, our public finance business generated $36 million of financing revenues, up 33% from the first quarter of this year, and 17% compared to the second quarter of last year. We underwrote 239 municipal negotiated issuances during the quarter, raising $4.3 billion for our clients. With low interest rates and a strong credit outlook, municipal market issuance continues to remain strong, driven by new money issuance as well as continued refinancing activity. While our governmental business, which drove our strong results last year, remains strong, The upside to our performance this quarter was driven by great results from our specialty sector clients, which include special districts, health care, senior living, education, hospitality, housing, and transportation. We were able to assist our clients in pricing a number of higher margin transactions in the quarter. Our high-yield platform within public finance, centered around specialty sectors, differentiates us in the marketplace and provides diversification to our governmental business. This combination of sector expertise provides us with one of the largest specialty businesses in the market, and these segments continue to be an important growth driver for us. On a year-to-date basis, municipal financing revenues of $63 million represent our strongest first half on record. Our relative performance was also strong, with first half revenues up 18% from 2020 relative to a 3% increase in the overall market based on par value of municipal negotiated issuances. Looking forward, our pipeline remains strong and we expect the second half of this year to be similar to the first half. Turning to fixed income. For the second quarter, we generated fixed income revenues of $61 million, down 8% on a sequential basis and up 25% compared to the second quarter of last year. The 10-year Treasury rate decreased from 1.74% at March 31st to 1.47% at June 30th. The reduction in yields has driven some market participants to the sidelines, awaiting more clarity in the direction of rates. However, activity within our financial services clients continues to remain strong as banks are flush with excess liquidity. Our deep expertise, market leadership, and breadth of relationships has enabled us to advise these clients on repositioning their balance sheets and investing in a low-rate environment to seek any available yield curve or spread opportunities that are attractive on a risk-adjusted basis. Activity among many of our other clients was softer relative to the first quarter of this year, as tight spreads and low yields led clients to remain on the sidelines, resulting in a decline in secondary trading, particularly in tax-exempt municipals. We continue to build our fixed income sales team, focused on hiring highly productive individuals who have deep relationships and product expertise, and who can leverage our platform capabilities to grow their book of business. As part of that initiative, we hired two senior salespeople in the second quarter, both specializing in non-agency structured products. In addition to hiring, we see opportunities to increase client penetration and the productivity of our existing sales force by leveraging our platform's full capabilities and serving clients with advice and product expertise that goes far beyond traditional bonds. From an outlook perspective, with the current low rates and uncertainty over the direction of interest rates, in July we have experienced a slowdown in client activity. Now I will turn the call over to Tim to review our financial results and provide an update on capital use.
spk00: Thanks, Deb. As a reminder, my comments will be focused on our adjusted non-GAAP financial results. We generated record net revenues of $493 million for the second quarter of 2021, an increase of 19% over the sequential quarter and 68% from the second quarter of last year. Our performance in the quarter was driven by strong contributions from our investment banking businesses, including record advisory services revenues. Net revenues for the first half of 2021 totaled $906 million, an increase of 69% over the prior year period, as we benefited from the significant recovery of investment banking as well as robust brokerage activity. Turning to operating expenses and margin, our compensation ratio was 60.7% for the second quarter of 2021, down from 61.5% for the first quarter of this year. reflecting our strong performance in the quarter and first half of this year. On a year-to-date basis, our compensation ratio was 61%. We continue to manage compensation levels while considering investments, employee retention, and business outlook. Based on our current market outlook and pipeline of growth opportunities, we expect our full-year compensation ratio to be near 61%. Non-compensation expenses excluding reimbursed deal expenses, were $49 million for the second quarter of 2021, an increase of 10% on a sequential basis as we are starting to see a pickup in travel-related costs. We anticipate a continued increase in travel-related expenses through the remainder of the year. For the second quarter of 2021, we generated operating income of $136 million and an operating margin of 27.7%, both of which represent quarterly records. These strong results represent the third consecutive quarter with over $100 million of operating income and the fourth consecutive quarter with an operating margin in excess of 20%. On a year-to-date basis, we generated operating income of $239 million, an increase of 196% over the prior year. Our margin for the first half of 2021 was 26.4%, Our operating income and margin reflect the increased scale we have built, the successful integration of our acquisitions, and the benefit of lower travel-related expenses. We continue to demonstrate our ability to drive operating margin expansion while growing revenues and generate significant levels of excess cash from operations. Our adjusted tax rate was 26.6% for the second quarter of 2021 and within our guided range. Our adjusted tax rate for the first half of 2021 was 25.8%, slightly below our range as we recorded the tax benefit in the first quarter related to restricted stock vesting at prices higher than their grant date price. We continue to expect our full-year adjusted tax rate will be within our targeted range of 26% to 28% going forward. Turning to earnings, for the second quarter of 2021, we generated net income of $99 million, up 31% sequentially, driven by higher revenues and an improved margin. Diluted EPS for the second quarter was $5.37, representing our strongest quarter on record and an increase of 29% over the previous peak. For the first half of 2021, net income totaled $174 million, and diluted EPS was $9.51. Compared to the first half of 2020, we nearly tripled net income and diluted EPS driven by the significant improvement in markets and our strong execution. Let me finish with an update on capital. With record earnings and no significant increase in operating capital usage, excess liquidity continues to build and our capital position remains strong. We're committed to returning capital to shareholders to drive total returns. During the first half of 2021, We paid an aggregate of $41 million to our shareholders through our quarterly and annual special dividends and repurchased approximately 321,000 shares or $36 million of common stock in order to offset dilution from annual stock grants. In addition, the board approved a quarterly dividend of 55 cents per share to be paid on September 10th, 2021 to shareholders of record as of the close of business on August 27th. This quarterly cash dividend represents a 22% increase compared to the quarterly cash dividend paid for the first quarter of this year. Overall, we are thrilled with our record second quarter and first half results. Our business continues to be well positioned for growth against a strong market backdrop, and we are confident in our ability to grow and deliver shareholder value by executing on our long-term strategic objectives. Thanks, and we can now open up the call for questions.
spk06: We will now begin our Q&A session. And in order for you to ask a question, simply press the star, then the number one on your telephone keypad. Again, if you would like to ask a question, simply press the star, then the number one on your telephone keypad. One moment, please, for our first question. Our first question comes from the line of Devin Ryan of JMP Securities. Your line is open.
spk02: Good morning, everyone. How are you? Good. Hi, Devin. Maybe start with a question or a couple questions on the M&A advisory business. Chad, maybe just to dig in a little bit on some of the outlook commentary. Clearly, a very good environment right now. We're hearing the middle market M&A is incredibly active, and you guys are clearly participating in that. I'm just curious as you kind of look out, it sounds like perhaps there could be some pull forward into this year. you know, for tax reasons or other reasons. I'm just kind of curious what the biggest drivers are of activity there. And then the other part of the question just is on balance. Specifically, you know, you highlighted it. We've seen some really nice productivity there, some large deals. So, you know, curious if that's just a function of their business momentum that they already had or their benefits that they're already seeing being on the Piper platform.
spk03: Yeah, thanks, Devin. Yeah, we're obviously seeing really good activity in advisory and are really happy with Q2, but continue to see very good pipelines. I would say, as I think about the drivers for advisory, one of the things across the M&A market, if I just compare to other years in the past where it's been strong, is it's just really strong across so many industry groups and segments. So you're just getting broad-based participation in the M&A market. And then, like we commented, there's definitely a secular change in M&A that's somewhat just driven by sponsor activity. I mean, there's just so much capital in various alternatives and private equity that that is having a big impact on business. Obviously, financing is good. I think at the beginning of the year, You know, we got asked the question about, you know, tax rate and future tax rate. And, you know, we had started to hear that on a few transactions. You know, as the year has progressed, you know, there's definitely some processes, you know, that we started over the summer that want to, you know, finish by year end. So, you know, I also think that's helping the year. You know, I don't think that's overwhelmingly driving the timing of some things, but it's just another factor. And then specifically to your valence question, yeah, if you just remember, we closed on this transaction last spring. You know, not obviously the greatest timing we closed, you know, very little revenue in the back half of the year, but they have just had a spectacular first half. And I would say, frankly, you know, most of that Revenue is to come because a lot of these transactions were just announced, and several of them were quite large. Many of them involved private equity. There's definitely examples of where being on our platform has helped, but most of this is just years of building the expertise and being thought of as, you know, a really good partner in that space. And it's just resulted in some, you know, really key marquee transactions, you know, that are frankly pretty large, you know, some middle market, but, you know, several pretty large. So, you know, great backlog of transactions to close here in the second half and early next year.
spk02: Okay, terrific color. Thanks, Chad. Maybe one for Deb on the fixed income brokerage opportunities that you alluded to. I'm just curious if you can give any more specifics around the potential scale that you could see from some of these initiatives to expand the platform and then whether that implies more capital need in some of those areas as you expand.
spk01: Yeah, Devin, so it's really about continuing to build out the breadth of our product expertise that, as you know now, with the combination with Sandler, goes way beyond just normal bonds, QSIP business, derivatives, loan trades, and securitizations. Some areas we're focused on, even specifically with securitizations, is one that we think there's some opportunity to build out. I would say we still have not fully realized the benefit of the combination, either while we've seen Really nice revenue growth from what was the two separate businesses now combined. There's still work that we're doing to leverage the broad products that we have that was very complementary between the two businesses across the combined sales force and focused on driving really strong analytics and tools focused on various client verticals that we've talked about. Relative to your question on capital, as you have seen, we have reduced the amount of capital that we have used in that business, partly given the scale and just the breadth of the products we have. We do not see a need for dramatically increasing capital in any way to grow the business, so that's not part of the focus. I don't know if that answers your question fully, Devin, but it's my thought.
spk02: No, very helpful. Thanks, Deb. Maybe if I can just squeeze one more in, give one for Tim as well here. So just on the expenses, on the comp ratio, I've heard the guidance that probably end up closer to 61%. I think you previously were talking about 62%. Should we think about kind of 61% as maybe the bottom range here now going forward to the extent revenues remain low? strong or is there room for even more leverage off of that to the extent, you know, there's opportunity for revenue growth into next year or just how we should think about kind of the flex on the comp ratio, especially given that it's probably going to end up better than we were previously predicting.
spk00: Yeah, Devin, I think you're thinking about that right in terms of, you know, what we've talked about before and, you know, where we're currently at. I think, you know, this is sort of the right level based on, you know, revenue levels and at current activity. In that rate, there's still room for more leverage, but we're still very focused on what we can do from an investment perspective within that 61%, what we're thinking about in terms of just overall retention. So I don't see a large move on that rate. with revenue level sort of where they're currently at.
spk02: Okay, great. All right, well, I'll leave it there. Thank you, guys. Congrats on a nice quarter. Thank you.
spk06: Thanks, Kevin. Your next question comes from the line of Mike Randall of Northland Security. Your line is open.
spk04: Hey, thanks, guys, and congratulations. After December and March, it's really tough. tricky to have an encore but you clearly did um chad just in relation to your comments on sort of the advisory business at peak levels can you maybe comment a little bit about where you think we're in the m&a cycle how much of this business is coming from financial sponsors and just kind of who you're seeing is your competition today yeah i would um
spk03: We definitely, I mean, obviously, you know, with the results, you know, we're sort of at, you know, new peak levels for advisory. But, you know, I would say we feel like this has room to run just, you know, looking at our pipelines. I mean, really across almost every industry team, we're at record levels for pipelines. So, you know, some of it, you know, whether we, you know, Whether we're at the end of a cycle or the beginning of a cycle, that's a tough question. I personally believe we're in a secular growth market for M&A across many industries. Obviously, private equity is at record levels, record levels of cash, but I also think strategic acquirers, just the pace of change and the businesses they want to enter across many of the segments Oh, very good. So, you know, I really believe we've got a lot of room to run here in advisory. And then just help me with your second question again.
spk04: Oh, financial sponsors. How much of that M&A advisory business is coming there? And then just, I guess, part three was kind of who are you considering your competitors today?
spk03: Yeah, so we... you know, financial sponsors continue to be, you know, very active. I think, you know, still, you know, somewhat north of 50% influenced, you know, in most of our transactions, you know, which is, you know, fairly close to the middle market. What I would say relative to our competitors is, you know, that really just depends on the industry team. I We obviously have different competitors in advisory for health care. There's certainly other boutiques, but lots of the big transactions we do in health care and other spaces, we compete with the bulge bracket. And then across just the bread and butter private equity business and industrial and consumers, that's a lot of the middle market sort of boutiques. So it's really hard to answer that question unless we're talking about a particular industry team.
spk04: Sure. And maybe I meant a little bit more the level of competition. Is it getting more intense? How are you seeing the overall level?
spk03: Yeah, I wouldn't say it's any necessarily more competitive. I mean, for sure, you know, we know we are at and other firms are at, you know, capacity and, and, In certain levels. So we've got the opportunity to be awfully choosy about kind of which transactions we take on, which really helps, you know, increase an already good close rate even higher. It certainly gives us leverage on fee structures. So it's a competitive market. You know, lots of advisory groups are doing well. But I think, frankly, just The pace of activity is even just outpacing, you know, capacity amongst all of us.
spk04: Got it. And then, hey, just lastly quick, recruiting plan. You mentioned the five new MDs this year. Should we expect you to see you guys kind of continue to layer in at about that pace?
spk03: Yeah, what I would say is obviously adding five in the first half was really good. We're sort of proud of doing that in a competitive market. It is true that we add more in the front half of the year than the back half of the year. Obviously, with a very good year, investment bankers are doing well, firms are doing well. It's going to get tougher to add as the Year goes on. We're still working on the growth initiatives. We have some interesting team hire discussions. We have others. But I don't see the pace staying the same just based on the time of year. But for several quarters now, we've continued to grow MD headcount. So I don't know if that continues every quarter. But the long-term trend is we've got quite a bit of room to run there as well.
spk04: That's fair. Hey, congratulations again. Thank you.
spk03: Thank you.
spk06: And once again, if you would like to ask a question, simply press a star, then the number one on your telephone keypad. Your next question comes from the line of Michael Brown of KBW. Your line is open.
spk05: Okay, great. Hey, Chad, Deb, Tim, how are you guys? Hi. Good. So I wanted to, I guess, start with advisory. Obviously, a really strong first half of over 100% year over year. Chad, you made a comment about the momentum there and an expectation for, I forget the exact wording you used, but basically a good second half here. I guess my question is a lot of your peers have talked about the potential for the second half to be stronger than the first half. I think you had a bit of an outperformance in the first half relative to your peers. But is there any way to kind of put some stakes in the ground on the expectations for the second half based on what you're seeing in the pipeline? Is it possible to meet or exceed the first half?
spk03: Yeah, I think the way we think about advisory, we would agree with you. I think if you look at everybody that's reported and others that are out there, we think on an advisory level we've outperformed in the first half. And so while we think we're going to continue to have a very strong second half, I'm not going to stand here and predict that it's going to be up from the first half. But certainly based on what we're seeing in the pipeline deals we have announced, you know, level of activity, you know, we feel good about, you know, trying to replicate the first half and the second half for advisory.
spk05: Okay, great. And then during the quarter, the Biden administration, you know, basically urged for greater scrutiny on M&A transactions, kind of greater antitrust transactions. considerations on M&A deals. And, you know, one of the areas was kind of a specific spotlight on bank M&A and, you know, encouraging the FDIC, OCC, DOJ, and Fed to take a more robust review of mergers there. Can you speak to what your expectations are there for your business? It appears to be a bit more focused on large-cap bank M&A, but I wanted to hear your thoughts if that could certainly, you know, move down to the smaller community-sized banks as well.
spk03: Yeah, we certainly recognize across all industries some of the commentary from the administration. If we see this in several industries, it's certainly hard to argue that it wouldn't have an effect on the M&A business. All I can tell you is just from the level of activity, it's hard to see how that's going to unfold. Specifically with financial institutions and depositories, there has been specific commentary. I personally think they will be focused on the much larger transactions. If you really think about it, a lot of the middle market transactions we're doing and even some of the larger regional transactions I would argue that is giving these banks an opportunity to compete better, offer a better level of services to the consumers, and compete with the larger banks. So I'm not sure I generally agree with sort of the philosophy, but there's no question there's been commentary. What I can say is you can just look at our deals and deals announced across the street in the last month or two since that came out. It hasn't slowed down. activity at all and the level of conversation is high and the amount of deals we have announced is high. So I think the way you phrased that question is correct. I think there's going to be a lot of scrutiny at the very, very large deal size.
spk05: Okay. Yeah, I appreciate the thoughts there, Chad. Maybe just one last one for me on the dividend. Great to see another increase there. is is uh i just want to make sure i miss it i guess kind of changing the the payout um expectations is that still the right way to think about it or you know are you maybe going to run with a little bit higher dividend payout now or is this just kind of speak to the fact that you're seeing you know a higher um durability like durability to your higher eps here going forward
spk00: Yeah, Mike, maybe I'll take that. So our dividend payout ratio is 30% to 50%. That's still the plan and what we have in place, which includes the four quarterlies and then the special. We've run over the last couple of years more at the lower end of that range because we've been deploying a lot through corporate development. I think we've talked over the last quarter or two where given the amount of cash generation we've got, we likely move more up in that range. And you're right, in terms of just, again, the overall level of earnings and this consistency of a higher level of EPS, we do feel like it's the right thing to remix in some ways to more of a quarterly And that would obviously bring, you know, bring the special down a little bit more. So, you know, we're thinking about that mix, you know, but the dividend payout ratio of, you know, 30 to 50 stays, it's just, yeah, we're likely, you know, more at the higher end of that range given the results.
spk05: Okay, great. Thanks, Tim.
spk06: And there are no further questions at this time. I would like to turn it back to Mr. Chad Abraham for the closing remarks.
spk03: Thank you, Operator. I'll close by thanking all of my employee partners for their continued hard work and dedication to our clients. Thanks to everyone that joined the call. We very much look forward to updating you on our third quarter results. Have a great day. Thank you.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating in MeNow Disconnect.
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