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spk03: Good morning and welcome to the Piper Sandler Company's conference call to discuss the financial results for the third quarter of 2022. 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.pipersandler.com and on the SEC website at www.sec.gov. This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP 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 these non-GAAP 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.
spk05: Good morning. and thank you for joining us. 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. While the global economy continues to face headwinds, Piper Sandler delivered solid results during the third quarter. As I've stated before, our diversified business model continues to perform well, and I'm particularly pleased with the results we've achieved in our equities business. While we remain focused on adding scale and increasing market share in our financing and brokerage businesses, our number one priority remains growing our advisory business through sector and product expansion. Thus far in 2022, we have completed three acquisitions and made multiple senior hires, which has moved us forward on both objectives. To that point, in October, we closed on our acquisition of DBO Partners, a technology investment banking firm. DBO roughly doubles the number of senior producers and provides additional scale to our technology practice. DBO's franchise also enhances our credibility with both large cap corporate and large cap sponsor clients within the technology landscape, given their established track record of working with market leading clients on high profile transactions. In addition, DBO adds a general partner advisory practice that is highly complimentary and increasingly important to our private equity clients. We're excited to welcome the DBO team to the Piper Sandler family. Turning to our financial results, during the third quarter of 2022, we generated adjusted net revenues of $335 million, a 17.3% operating margin, and adjusted diluted EPS of $2.32. During the first nine months of 2022, we recorded adjusted net revenues of $1 billion, an 18.6% operating margin, and adjusted diluted EPS of $7.93. Our results, although lower compared to the exceptional prior year period, reflect the increased earnings capacity of our platforms, driven by the investments we have made over the last several years. Next, let me review our corporate investment banking business, beginning with advisory services. Advisory revenues of $175 million during the third quarter of 2022 increased 3% sequentially and declined 18% from the strong third quarter of last year. Our revenues improved compared to the second quarter as we advised on more transactions with larger fees. However, market volatility continues to impact transaction timelines. Performance during the quarter was diversified across our business sectors. Our energy and power team had a particularly strong quarter, benefiting from renewed interest and increased activity in this space. In addition, our revenues continue to reflect meaningful contributions from our healthcare and financial services teams. More broadly, Piper Sandler was the number two advisor for US M&A deals under $1 billion, based on number of announced transactions during the first nine months of this year. Our advisory pipelines across verticals remain strong, and we expect the fourth quarter of 2022 to be stronger than the prior two quarters. However, conversion of these pipelines is being increasingly impacted by the more challenging market environment. Turning to corporate financing, we generated $40 million of financing revenues during the third quarter of 2022, an increase of 37% compared to the prior quarter, and down 49% from the third quarter of last year. Although the equity capital markets remain largely shut, we improved on a sequential basis driven by a brief window in August when the market was more accommodating. Overall, we underwrote 20 equity deals during the quarter, serving as book runner on 18th. We also completed several preferred and debt capital raises for financial services companies. Despite the improved performance during the quarter, market conditions continue to remain challenging. However, in the coming quarters, we expect increased capital markets activity as clients that require access to capital will take advantage of market window opportunities or more stable conditions. Turning to investment banking managing director headcount, inclusive of the DBO acquisition, we now have 159 managing directors, the most in our history. Our success and momentum continue to resonate in the marketplace, Both our recruiting efforts and the development of our own talent continue to be priorities. In closing, there is no question that market conditions remain challenged and have had an impact on asset prices and market activity. That said, we remain focused on factors that we can control and executing on our growth initiatives. We've transformed our business model significantly during the past five years, which has put the company in a position of relative strength that should drive growth in the coming years. Client engagement remains strong and we're enthusiastic about the opportunities in front of us. I am confident in our ability to navigate the market environment and deliver long-term value to our shareholders. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.
spk04: Thanks, Chad. I'll begin with an update on our public finance business. We generated $27 million of municipal financing revenues during the third quarter, down 25% from the second quarter of 2022. Higher nominal interest rates and increased rate volatility negatively impacted activity for us and the market. In particular, refinancing activity has essentially come to a halt. Overall market issuance during the quarter declined to approximately $94 billion, with the number of issues down 33% from the second quarter of 2022. We've seen investor demand weaken as the market experienced significant municipal fund outflows. During the third quarter of this year, we underwrote 93 municipal negotiated issues with an aggregate par value of $3.4 billion and ranked as the number two underwriter based on number of issues in this market. Activity for us was led by our governmental business. Looking ahead, we expect the fourth quarter of 2022 to be similar to the third quarter based upon current market conditions and investor sentiment. Our backlog of specialty sector financings is significant, and we could experience upside if market conditions allow for execution of this pipeline. Turning to equity brokerage. Equity markets continue to experience elevated volatility and volumes during the third quarter. Our equity brokerage business generated record quarterly revenues of $53 million, benefiting from the elevated volumes and the addition of cornerstone macro to our platform. Performance during the quarter was broad, with our high-touch, derivatives, program, and algo trading all generating increased activity, highlighting our robust trading platform. We are experiencing strong momentum across our platform, and client votes and market share metrics have been increasing. We maintain the fourth largest U.S. active client base and rank as one of the largest research platforms in the SmidCap category based on companies under coverage. In addition, our market-leading macro research franchise combined with our full suite of trading capabilities make us an attractive destination for clients. We continue to pursue opportunities to deepen client relationships and cross-sell products across the platform. From an Outlook perspective, We expect to finish 2022 strong, driven by continued volatility, market share gains, and clients positioning their portfolios for 2023. Lastly, turning to our fixed income business. Market conditions became extremely challenging during the quarter, driven by increased rate volatility, as well as aggressive Federal Reserve monetary tightening and expectations for further tightening. Inflation has remained elevated, and the market has begun pricing in a recession, resulting in an inverted yield curve. For the third quarter of 2022, we generated fixed income revenues of $37 million, down 31% from a strong second quarter this year, as market dynamics have significantly muted client activity. Our depository client activity was particularly soft, driven by lower deposit levels combined with an increase in bank lending. Activity among our municipal-centric clients has been reasonably solid given the relative value in municipal securities. While the near-term outlook for fixed income is challenging and difficult to predict, over the long term, our business will benefit from interest rate stabilization at higher rates. 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 net revenues of $335 million for the third quarter of 2022, driven by solid performances across corporate investment banking and equity brokerage. Compared to the second quarter, net revenues decreased 3% as lower fixed income and municipal financing revenues offset the increase in corporate investment banking revenues. Net revenues for the third quarter of 2022 decreased 24% from the prior year quarter due to lower corporate investment banking revenues, as well as lower fixed income and municipal financing activity, offset in part by higher equity brokerage revenues. Net revenues for the first nine months of 2022 totaled $1 billion, down from the year-ago period, which benefited from record corporate investment banking activity. Turning to operating expenses and margin. Our compensation ratio was 62.5% for the third quarter of 2022, in line with the compensation ratio for the second quarter of this year, as well as the first nine months of 2022. Based on our current outlook, we expect our full-year compensation ratio to be near the current year-to-date level. Non-compensation expenses, excluding reimbursed deal expenses for the third quarter of 2022, were $60 million, flat compared to the second quarter of this year and consistent with our expectations. During the third quarter, we generated operating income of $58 million and an operating margin of 17.3%. For the first nine months of 2022, operating income totaled $194 million with an operating margin of 18.6%. Our adjusted tax rate was 27.4% for the third quarter of 2022 and 25.1% for the first nine months of the year, which included a $5 million tax benefit related to restricted stock vesting at prices higher than the grant date price. Excluding this tax benefit, the adjusted tax rate for the year-to-date period was 27.9%. We continue to expect our full-year adjusted tax rate will be within our targeted range of 26% to 28%, excluding the impact from stock bestings. During the third quarter of 2022, we generated net income of $41 million and diluted EPS of $2.32. On a year-to-date basis, net income totaled $141 million and diluted EPS was $7.93. Let me finish with an update on capital. We continue to generate significant levels of cash to deploy through corporate development, share buybacks, and dividends to drive shareholder returns while maintaining our Capital Light business model. We have deployed capital during the year to build out our platform capabilities and drive long-term growth through the acquisitions of Cornerstone Macro, Stanford Partners, and DBO Partners. During the third quarter of 2022, we repurchased approximately 199,000 shares of our common stock or $22 million. On a year-to-date basis, we have repurchased approximately 1.4 million shares of our common stock or $186 million, which more than offset the share count dilution from this year's annual stock grants and acquisitions. Combined with our dividends paid, We have returned an aggregate of $285 million to shareholders during the first nine months of this year. In addition, today the Board approved a quarterly cash dividend of $0.60 per share to be paid on December 9th to shareholders of record as of the close of business on November 23rd. With that, I'm going to stop there and open up the call for questions.
spk03: If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Steven Chuback with Wolf Research. Please go ahead.
spk08: Good morning. This is Brendan filling in for Stephen. Hey, Brendan. Hey, Brendan.
spk06: So, to start, one of your peers noted that they've seen some improvement in M&A conditions this quarter. Based on your commentary, it sounds like you have a little bit more of a measured take on the overall environment, but at the same time, the sequential pickup in your advisory business would suggest that you are seeing at least some improvement in the overall financing conditions and buyer seller expectations narrowing. So just wanted to get a sense as to how you see the environment today relative to last quarter.
spk05: Yeah, I would say to be honest, not much has changed. I mean, we had a small sequential pickup. I mean, you know, that can be from, you know, just a couple of larger fees That closed I mean we continue to see things you know a pretty difficult market, you know deals are getting done They're taking longer longer to get announced longer to get closed Financing markets still tough, you know, maybe as with the passage of time buyer and seller expectations start to line up. But I think we just, we sort of view it as more of the same. And, you know, that's sort of the trend we've seen into Q4 here.
spk08: Gotcha.
spk06: And then on your equity trading business, momentum there was quite impressive. While you're on your comps are obviously skewed by the cornerstone acquisition. I believe you're one of the only names to actually see revenues grow quarter on quarter. I just want to get a sense as to whether you're seeing greater synergies from the cornerstone acquisition than you previously anticipated, or what has driven these share gains, and whether that impacts your view on the overall run rate for the business going forward.
spk04: Yeah, at the end of the day, we're seeing the benefits and clearly of Cornerstone, which you just announced, but it's really the combination of that with the overall platform that we've built. So the trading platform that we've built over time and having those come together. So it's just, we're seeing from our clients, our ability to add more value where, you know, a lot of this is the collaboration that's happening between these teams, single stock, macro views, liquidity and trading. what we're doing relative to getting corporate access and insights out there for our clients. So I would agree that this has been positive relative to Cornerstone coming on board, and I think we're additionally helped by the volatility in the marketplace, which is giving us a little more of a tailwind. So we feel good about the business and where it's going going forward.
spk08: Thanks for taking my question. Thank you.
spk03: We will take our next question from Devin Ryan with JMP Securities. Please go ahead.
spk09: Hi, this is actually Michael Falco standing in for Devin. Thanks for taking my question. I wanted to start with fixed income brokerage. Revenue is obviously down quite a bit sequentially, and you noted muted activity among depository clients. How should we be thinking about that business going forward? Is this quarter a good jumping off point in the current environment, or could there be another down here as depositories have less excess liquidity?
spk04: Yeah, I would say as we look into what visibility we've had so far into this quarter, which is one month, we see more of the same from what we had been seeing in the third quarter. The bottom line is, though, there's been significant volatility in rates, sharp move upward. no sign that that's necessarily stopping near term and a lot of actually uncertainty in the market, which is probably the biggest thing that's been driving the softness in that business. So, yes, a significant part of our business is depositories, which, as you know, much less liquidity for banks and credit unions now, as well as they had seen some increase in loan demand. I would say on the other client verticals that we have, We had seen some strength in those, maybe in second quarter offsetting depositories. That has not been the case, as you saw in Q3. So again, see that somewhat continuing here as they're dealing with this inverted yield curve and uncertainty in rates. And I guess the other thing I would just add, at the end of the day, if we just step back and think about the business, we are doing work to continue to build out and the client verticals so that when we get to a more conducive and receptive market, we feel confident in the platform to take advantage of that.
spk08: Thanks. That's very clear.
spk09: Appreciate the color. And then maybe shifting gears a little bit, obviously growing the advisory business remains a priority. You closed DBO earlier this month. Can you talk about the capacity for additional M&A from here? We're hearing there are still some middle market advisory firms in the market potentially for sale, and assuming that it's a better time for consolidation than a year ago, what are you seeing and what's the level of appetite? And then maybe remind us as well what your top priorities are right now for sector and geographic expansion as well. Thanks.
spk05: Yeah, sure. Yeah, I mean, we've had a lot of success, obviously, with – Simmons and Sandler and Valence and, you know, really adding those verticals. We're really excited about DBO. I think, you know, that's been the priority for, you know, internally from our internal partners, you know, from leadership. It's just a big sector. You know, obviously, it's a tougher time in the software and tech M&A market. But, you know, frankly, that's when we like to build the platform. So, you know, I would concur some of the best things we've done is when things are a little more difficult. What I would say about the market is pretty much every boutique, every investment bank had a record in 2021. I think reality is setting in a little more in 2022. That takes time. Just like some of our clients on the buyer-seller expectations, you need to see that in the boutiques. But we expect next year to be a good time to be in the market and looking at transactions I would say our priorities are the same. We're still very interested in building our tech business to be as big as our financials and healthcare business. I would say geographically, even given the challenges in Europe, we think there's still just low hanging fruit for us as relative to other middle market banks. We're under penetrated in Europe. Again, we're not going to stretch too far, but in the areas health care, financials, some of the things we're really good at. Consumer, obviously, at our Stanford partners. So we're going to continue to look to grow in Europe. And then there still are white spaces for us. We've looked more and more at just with all the things we do in public finance, in real estate, all the things we do in financial services, in real estate. You know, is there more we can do collaboratively across the organization in the real estate vertical? Can we build a bigger business there just as an example?
spk08: Great. I appreciate all the color. I'll hop back in the queue.
spk01: Thank you.
spk03: We will take our next question from James Yarrow with Goldman Sachs. Please go ahead.
spk02: Good morning, Chad, Deb, and Tim, and thanks for taking my questions. Maybe I'll start with you, Chad. We've seen a much faster pace of rate hikes than I think people expected earlier in the year. How is this factored into your client dialogues? And then is there sort of an absolute level of rates that you think would more significantly impact M&A activity going forward?
spk05: Yeah, I mean, it obviously depends so much on the various, you know, business lines relative to rates. I would say, you know, one of our biggest business lines, obviously with, you know, in the sponsor business, you know, it's a lot more expensive to finance some of the deals. I think if you look over a longer time, you know, it's still okay on financing, but it takes a while to set those standards. expectations. So that is certainly one example. I would say in financial services, you know, we were doing a lot of sub-debt deals in the bank space and, frankly, other areas of financials. Obviously, those rates have changed quite a bit. And so, you know, that's affected that business. You know, will it, you know, part of financial services, the question will be, you know, will that then prompt people to raise more equity capital markets, which you know, is possible. So it's a very different outcome. Obviously, you saw we had tough public finance results. You know, it's taken a while for those clients to reset. You know, I do think, you know, the bigger question is just where are rates going, how fast sort of people trying to get an understanding. And certainly if the absolute rate is much higher from here, there will be, you know, certain parts of the business that will be long-term impacted. There'll also be other parts, you know, that will be helped. You know, like I do believe, you know, per Deb's comments in fixed income, once we get to higher rates and it's sort of stable, you know, I think that's going to be a very good run for fixed income. So, you know, your crystal ball is as good as mine.
spk02: Okay, that's very clear. Deb, maybe if, you know, we just turn to muni financing, is there any way to think about, you know, how would you sort of, think about helping us with sort of the KPIs or key drivers for that business over the long term. Is it focusing on the absolute level of rates or market volatility, and is that sort of what's driven the lower activity in the near term and just over the long term? How should we expect that to sort of recover?
spk04: So I would actually break it into two parts. James, I would say on the governmental side, think of more of the investment-grade business, That had been helped over the last number of years, really many years, with refinancing opportunities. So being able to look at just market dynamics on new issue versus just refinancing. So we have seen, I would say, this year where the new issue had helped to offset really, I think, new money year to date, probably flat year over year. So there hasn't been a decline there. It's been all the refinancing that, you know, as I had mentioned, previously has pretty much come to a halt. So in that business, that's really where the rates matter. And I think with new money, many times, as long as the rates don't go up too significantly, deals can still get done as there's new projects. On the specialty side, whether that's special districts, healthcare, education, et cetera, Those areas, it's really right now being impacted by, because these are high-yield, impacted by flows. And I guess I would say across the board you can look at muni flows, but in particular high-yield flows have made it much more challenging to get deals done if there's just not the liquidity in the marketplace. And the last thing I would say is, again, as Chad just mentioned, it's stability of rates. So if you think about, we've had these situations where we've been working with clients on deals, thinking it's one market environment, and very quickly rates increase, and now we're in a very different market environment, and so then you're back to the drawing board. So I do think just stability in rates is going to help significantly. But right now, it's tough out there.
spk08: Thank you. That's super helpful.
spk01: As a reminder, if you would like to ask a question, please press star one.
spk03: We will take our next question from Mike Grondahl with Northland Securities. Please go ahead.
spk10: Yeah, hey, thanks and good morning. Chad, in the press release, it talks about the advisory pipeline being strong, but conversion is tough. Can you just help us understand what strong means with the advisory pipeline? sort of relative to what period of time, like last year's peak or kind of before that area? And then secondly, any comments on October? Should we think of October just kind of a continuation of the third quarter?
spk05: Yeah, what I would say about the advisory business, you know, it's not like other you know, you can just look at our results relative, you know, obviously relative to last year, our advisory results are down, but look back four, five, six years. I mean, it's still, you know, good revenue levels as we built the capacity and we built this MD count to 159 MDs. What I would say is, you know, we're still pitching business. We're still putting deals in the pipeline. We're, you know, have clients now that sort of say, hey, should we Paul Minehart, MCB4 Member, Launch or should we start in in Q1 and so you know launches are taking longer people are more cautious, you know we when we used to get a whole slate of bidders on a private equity deal, you know, maybe it's a Paul Minehart, MCB4 Member, A few and then, you know, trying to get one of them to close is much more difficult. So I would say relative, you know, to the last five or 10 years where you get, you know, long periods of M&A shutdowns or what happened in the beginning of COVID, you know, it's nothing like that. But every deal is harder. Every deal takes longer. The financing for sponsors has certainly changed the pricing. You know, you're starting, you know, the longer this goes on, the, you know, sellers aren't going to wait forever. They'll, you know, they'll come into line on pricing expectations. And I would just say that's more of what we're seeing in October. You know, we said in the script, you know, we expect our advisory business could be a bit better than Q2 and Q3. But, you know, that's lower than what it would be in a normal year. You know, normally Q4 is quite strong. And I think just given the environment, you know, while it could be our, you know, one of our better quarters of the year for advisory, the step up won't be like usual as, you know, we continue to see deals push out and deals not close. But, But it'll be a good quarter for advisory.
spk10: Got it. That extra color is helpful. Thank you.
spk01: We will take our next question from Michael Brown with KBW.
spk03: Please go ahead.
spk07: Good morning. This is Eden Hall filling in for Mike. Thanks for taking my question. Most of them have been asked, but I just Talking about the DBO team coming onto the platform, you noted the GP advisory practice that they bring. Can you just talk about the potential there in the medium term and as it relates to Piper's broader capabilities? Thanks.
spk05: Yeah, we're excited about that. I mean, obviously, you know, some of our competitors have big, big businesses, you know, working with private equity firms on, you know, other things besides, you M&A for their clients. You know, DBO has a history of doing some of these transactions, frankly, with even some, you know, large cap sponsors. Obviously, what we bring to the table is hundreds of other sponsor relationships to get those guys introduced. I think we're still in the early innings of opportunities. I mean, you know, private equity was selling, you know, maybe part of their GP. You can think about, you know, will there be more partial sales? Will there be full sales? You know, the impact of continuation funds, other vehicles that these folks set up. So I just think, you know, there's a big opportunity for us as we've really expanded this MD base and our sponsor relationships. And, you know, it's a pretty specialized capability that frankly, you know, some of the talent at DBO has that we didn't have. And so we're excited about where we can take this segment as we continue to believe private equity will be one of the biggest parts of our total advisory business.
spk08: That's great, Keller. I appreciate it. And thanks for taking my question.
spk01: We will take a follow-up question from Devin Ryan with JMP Securities. Please go ahead.
spk09: Thanks. This is Mike for Devin again. Appreciate you taking the follow-up. Just wanted to ask how you're thinking about more normalized revenue and earnings levels. Obviously, 2021 wasn't normal, but a lot of aspects of 2022 aren't normal either. Are there any frameworks we should have in mind, especially as you've added a lot of talent over the last year? I think banker MD headcount is up 15% or so from 2020. and also made acquisitions on the brokerage side, so the baseline keeps moving higher.
spk05: Yeah, what I would say is just, you know, the way I at least look at the investment banking part of the business, you know, obviously we haven't had, you know, we've just had the DBO team. We haven't, you know, we did Stanford in the middle of the year. It's not like we did, you know, some pretty good hiring this year So it's not like we've had those 159 MDs all year, you know, new MDs on the platform take time. You know, the way I look at the, at least the investment banking part, which is, you know, two thirds of our, two thirds or more of our businesses, you know, you look, you look over time for a while, we were kind of averaging, you know, four or five, 6 million, per MD, you know, obviously, as we've grown the platform and the products and we're doing bigger deals, you know, that productivity got, you know, in the good times to eight or nine million per MD. So I think, you know, some range in there is the opportunity of where total banking can go. Obviously, relative to equities, you know, we think we're at a pretty good run rate. And then, you know, on fixed income, you sort of have to have a view on when rates stabilize. But, you know, the one other segment of the business that we don't think is sort of a long-term run rate is, you know, our ECM business, you know, even though it's at least open with a trickle now and certainly better than the first couple quarters, it's still way below historical means. So we're not saying it's going to march back to 2020 or 21 levels, but we're pretty confident that we'll do more ECM business next year than we did this year.
spk08: That's helpful. Appreciate the color. Thank you.
spk01: Thank you.
spk03: There are no further questions at this time. Mr. Abraham, I will turn the conference back to you for any additional or closing remarks.
spk05: All right. Thank you, Operator, and thanks, everyone. We look forward to updating you on our fourth quarter and full year results. Have a great day.
spk03: This concludes today's call. Thank you for your participation, and you may now disconnect.
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