Piper Sandler Companies

Good morning and welcome to the Piper Sandler Company's conference call to discuss the financial results for the fourth quarter and full year 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.

Good morning, and thank you for joining us. I am here with Deb Shoneman, our president, and Tim Carter, our CFO. Hello. We will go through our prepared remarks and then open up the call for questions. Our diversified platform continues to perform well despite the challenging market backdrop. We finished 2022 with the fourth quarter representing our strongest quarter of the year. We generated adjusted net revenues of $391 million, a 19.3% operating margin, and adjusted EPS of $3.33. On a full year basis, adjusted net revenues were $1.4 billion, generating an 18.8% operating margin and adjusted EPS of $11.26. 2022 was our second strongest year on record, behind 2021. There are a number of highlights worth noting from 2022. We acquired DBO Partners, which doubled our technology banking platform, and positions us well for further growth in this important sector. The acquisition of Cornerstone Macro added a high-quality macro, thematic, and quantitative research product that has proven to be synergistic with our equities business. We acquired Stanford Partners, a specialist M&A boutique focused on European food and beverage companies, which represents a natural expansion of one of our existing industry power alleys. We generated advisory revenues of over $770 million, representing 54% of our total net revenues and our second best advisory year ever. We grew market share in our equities brokerage business, generating record revenues in that business line. And we grew investment banking managing director headcount on a net basis, finishing the year with 159 MDs, the most in our history. Overall, 2022 marks a successful year as we continue to make significant strides in expanding our market presence and in increasing the earnings capacity and resiliency of our platform. Now, I'll provide an update on our corporate investment banking business. We generated total corporate investment banking revenues of $258 million for the fourth quarter of 2022, up 20% sequentially. driven by strong performance in our advisory business. For the full year, investment banking revenues of $902 million declined 35% from our record 2021 performance. Sector performance was relatively broad, led by financial services, and included record years from both our energy and power and restructuring groups. Our performance within financial services was led by depositories, and included strong contributions from insurance, real estate, specialty finance, asset management, and fintech. When we combined with Sandler, one of our growth objectives was to expand our non-depository business, and we are experiencing strong momentum on that front. In 2022, non-depository revenues represented nearly 50% of our total financial services investment banking revenues, which compares to 32% for 2019 before the group joined our platform. Since the combination in early 2020, we have been adding headcount to expand our insurance, asset management, and real estate practices, and have nearly doubled our non-depository revenues during that time. By leveraging our broad financial sponsor coverage, we're winning more and larger mandates on a regular basis in these subsectors. At the same time, we have maintained our market-leading position in depositories. We were the number one advisor in U.S. bank M&A based on number of announced transactions, and we have advised on seven of the 10 largest bank mergers and acquisitions announced during 2022. Another sector with strong performance in 2022 was our energy and power group. We retained our leadership in oil field services where we were the number one advisor based on number of completed deals. In addition, over the last few years, we have diversified our business and built a solid presence in upstream and renewable energy. With one of the largest and most tenured teams on the street, we feel great about the outlook for this group. Specific to advisory services, we generated $221 million of revenues during the fourth quarter, up 26% sequentially. A strong finish, but given the market headwinds, this was less than the typical seasonal pickup of our fourth quarters historically. For the year, we generated $776 million of advisory revenues, the second strongest year in our history, behind an exceptional 2021. We benefited from the sector diversification of our business, along with balanced coverage between strategic and private equity clients. Our revenues from strategic clients during the year were resilient and on par with strong 2021. Advisory revenues from strategic clients represented approximately 54% of total advisory revenues compared to approximately 42% for 2021, which helped offset lower revenues from private equity clients. Rising and volatile interest rates have reduced financing options for financial sponsors and and negatively impacted deal activity with these clients. That said, PE firms and portfolio companies continue to maintain record amounts of capital to deploy. With one of the largest middle market PE advisory businesses on the street, we are well positioned to advise this client base when markets improve. During 2022, we closed or announced 230 M&A deals with over $82 billion in aggregate transaction value. With a core focus on taking longer strides rather than taking more, the trend of advising on larger transactions and generating larger average fees continues to be a key driver of our advisory results. We were able to hold our average fee size notwithstanding softer market conditions. We continue to take market share, and for the fourth quarter of 2022, We were the number one advisor on announced USM&A deals, under $1 billion, and for the full year, we ranked as the number two advisor. Looking forward, our advisory pipelines remain solid. However, the current economic conditions make conversion of those pipelines uncertain. We expect our advisory business to have a slow start to 2023 and anticipate our first quarter revenues to decline relative to the first quarter of 2022. Turning to corporate financing, we generated $37 million of financing revenues for the fourth quarter, slightly lower than the third quarter as debt financings declined. For the year, financing revenues of $125 million declined sharply from 2021 record results. Increased volatility, declining valuations, and reduced demand have largely kept equity issuers on the sidelines during 2022. For context, The equity market fee pool for 2022 was the lowest in over 20 years and declined more than 60% from the average of the last 10 years. Against this backdrop, we completed 55 equity financings during 2022, raising $40 billion of capital for our clients. Healthcare financings represented the bulk of our 2022 activity. Our financial services group completed 30 debt and preferred stock offerings raising $8 billion of capital for depositories and other financial services companies. We expect financing activity to increase in 2023 as companies raise needed capital to execute on their strategic plans. Turning to investment banking managing director headcount, we finished the year at 159 managing directors, the most in firm history. We remain focused on filling white spaces within investment banking. In addition to the acquisitions of DBO and Stanford, during the year we added talent to strengthen and broaden our industry and product coverage, notably in healthcare services, automotive aftermarket, transportation and logistics, and restructuring. Our success, culture, and momentum resonate in the marketplace, and we remain a destination of choice for top-tier talent. Historically, periods of market downturn have yielded compelling opportunities to add talent. As we have in the past, we remain disciplined and selective with the investments we make. Before I turn it over to Deb and Tim, let me make a couple of concluding remarks. Over the last decade, we have executed our strategic vision and delivered strong growth and shareholder returns. We have built a diverse and resilient platform with significant scale, margin, and cash flow. Within investment banking over the last 10 years, we have expanded our industry verticals to seven, now covering most of the economy, and have grown managing director headcount from 44 to 159. We are more relevant, provide more deal flow, and offer more product capabilities to a larger, more diverse client base. In addition, we have doubled the size of our equity brokerage and fixed income businesses over the last few years. The enhanced scale and capabilities of our platform have increased margins and profitability while providing meaningful opportunities for growth. Our integration and execution strategy is a key differentiator in the marketplace and has enabled our new partners to deepen their client relationships and grow revenues on our platforms. As I noted last year, we continue to execute on the path to grow annual corporate investment banking revenues to over $2 billion over the next several years, using the same playbook as the last decade, scaling industry groups, product share gains, increasing transaction and fee size, and corporate development. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.

Thanks, Chad. I'll begin with an update on our public finance business. In the fourth quarter, we generated 19 million of municipal financing revenues down 30% from the sequential quarter. This business is experiencing unfavorable market conditions as higher nominal rates, interest rate volatility, and lack of investor demand have significantly reduced municipal issuances. For the full year of 2022, we generated 108 million of municipal financing revenues down 34% from last year. We underwrote 571 municipal negotiated transactions, raising $15 billion of par value for our clients. Based on number of municipal underwritings for the year, we maintained our number two ranking. Overall market issuance for 2022 declined approximately 20% from the prior year. However, high-yield new issuance decreased approximately 40% due to significant fund outflows. This impacted our performance as a meaningful component of our public finance business is in high-yield specialty sectors. Our pipeline is strong, but it remains uncertain when conditions will become more conducive to closing transactions. As we look ahead to 2023, we expect market conditions to remain challenging. Higher rates have sharply curtailed refinancing activity, depressing new issuance volumes. However, we expect that our market leadership and diversification in the business will provide some resiliency to market headwinds. Turning to equity brokerage. Equity markets continue to experience elevated volatility and volumes, driving record equity brokerage revenues of $56 million for the fourth quarter, up 7% sequentially. For the full year, equity brokerage generated revenues of $210 million. This exceeded the goal we set for ourselves at the beginning of the year to build an equity brokerage business with revenues of $200 million. Performance on the platform was broad-based, with our high-touch program, derivatives, and algo trading all generating strong activity. Heightened volatility through most of the year provided tailwinds. During 2022, 79% of the trading days experienced intraday volatility between 1% to 3%, more than double the last three-year average. The strength of our platform helped clients navigate the volatility, and we traded 11 billion shares for over 1,700 unique clients. Strong collaboration between our fundamental analysts and our macro research analysts is bringing a valuable and differentiated view to our clients, recognized by increasing client votes. We maintain one of the largest research platforms in the small and mid-cap space with approximately 1,000 stocks under coverage. As we look forward to 2023, we see a more challenging market environment with a lower fee pool and likely less volatility. We have increased market share in each of the last five quarters, and we believe that cross-selling our products will result in further market share gains and mitigate most of these headwinds. Lastly, turning to our fixed income business. For the fourth quarter of 2022, we generated fixed income revenues of $50 million, up 34% on a sequential basis, and flat compared to the fourth quarter of last year. With a perception that interest rate increases may be slowing, clients were more active during the fourth quarter. Our depository clients were active in repositioning their portfolios ahead of the new year, and our municipal clients were active with tax loss selling as well as taking advantage of higher yields and the relative value municipals provide. For the full year of 2022, we produced 195 million of revenues, down 17% from last year. Volatility and uncertainty regarding the terminal level of interest rates combined with an inverted yield curve negatively impacted client activity. We continue to invest in this business, and we made several targeted sales and analytical hires in 2022 that increased our product depth and client specialization. The current market dislocation should provide opportunity for more targeted hiring in 2023 as we look to continue elevating our platform. From an outlook perspective, in 2023, we expect clients to be more active relative to the last six months. With higher nominal rates, the fixed income asset class represents an increasingly attractive investment opportunity. Now, I will turn the call over to Tim to review our financial results and provide an update on capital use.