Piper Sandler Companies

Good morning and welcome to the Piper Sandler Company's second quarter 2024 earnings conference call. Today's call is being recorded and will include remarks by Piper Sandler management followed by a question and answer session. I will begin by turning the call over to Kate Winslow. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining the Piper Sandler Company's second quarter 2024 earnings conference call. Hosting the call today are Chairman and CEO Chad Abraham, our President Deb Shoneman, and CFO Kate Kloon. Earlier this morning, we issued a press release announcing Piper Sandler's second quarter 2024 financial results, which is available on our website at pipersandler.com slash earnings. Today's discussion of the results is complimentary to the press release. A replay of this call will also be available at that same website later today. Before we begin, let me remind you that remarks made on today's call may contain forward-looking statements that are not historical or current facts, including statements about beliefs and expectations and involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those anticipated are identified in the company's reports on file with the SEC, which are available on our website at PiperSandler.com and on the SEC website at SEC.gov. Today's discussion also includes statements regarding certain non-GAAP financial measures that management believes are meaningful when evaluating the company's performance. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release issued today. I will now turn the call over to Chad.

Good morning, everyone. It's great to be with you to talk about our second quarter 2024 results. We delivered strong year-over-year growth, generating adjusted net revenues of $357 million, a 17.3% operating margin, and adjusted EPS of $2.52. Our diversified platform continues to deliver solid profitability, and as market conditions continue improving, we are well-positioned for a strong second half of the year. Corporate investment banking generated $235 million of revenues during the second quarter, an increase of 41% over the same period last year. For the first half of 2024, corporate investment banking revenues were up 33% from last year, with M&A and restructuring activity generating 65% of total corporate investment banking revenues, equity financings contributing 22%, and debt advisory and financings generating 13% of revenues. Results were driven by higher revenues from advisory transactions, the reopening of equity and debt capital markets, and strong relative performance. In addition, revenues generated from private equity clients were up significantly during the first half of 2024. During the year, we have deepened our sector coverage expanded our product capabilities, and grown our geographic coverage while closely managing headcount and productivity. In early June, we announced the pending acquisition of Avidity Advisors, a full lifecycle advisor to private equity GPs and LPs. Avidity was co-founded by Ryan Schlitt and John Robertshaw after previously holding senior positions in private capital advisory groups and asset management at Credit Suisse and DLJ. Ryan and John and their team will bring a wealth of experience and relationships to Piper Sandler. The Avidity team consists of approximately 45 professionals, including 11 managing directors, and will form Piper Sandler's private capital advisory group. The team provides fundraising services, secondary solutions to GPs and LPs, including continuation vehicles, and comprehensive capital market solutions for GPs across the lifecycle of their portfolio companies. The addition of these key capabilities will enhance the value of our platform to our single largest client base, private equity. By leveraging the combined network of financial sponsors with our broad sector coverage, significant opportunities exist to grow revenues over time. Specific to advisory services, revenues were $184 million during the second quarter of 2024, up significantly year-over-year driven by higher fees and more completed transactions. We benefited from broad-based contributions across our industry teams, along with increased revenues from PE clients. We completed 67 advisory transactions during the quarter. Performance was led by the financial services team, which closed several significant transactions that were announced prior to this year. In addition, our services and industrials, chemicals, and debt advisory teams all had strong quarters. Our market leadership, broad industry coverage, and product capabilities are driving strong relative performance, with our first half 2024 advisory revenues up 26% over the first half of last year, compared to middle market activity that was flat. Looking forward, the advisory market is gradually improving as CEO confidence strengthens. We expect our third quarter advisory revenues to be largely consistent with the second quarter, with the potential for upside as we build into a strong Q4. Turning to corporate financing, revenues were $51 million during the second quarter, down modestly from the first quarter. We completed 31 equity and debt financings, raising over $5 billion for corporate clients. Performance was led by our healthcare and financial services franchises. The healthcare team served as book runner on all nine equity deals priced during the quarter, and the financial services team completed a couple of large equity capital raises in the depository space. For the first half of 2024, the equity capital markets economic fee pool increased 54% over last year, while our economic fees increased 61%. The strength of our platform continues to drive market share growth. Looking ahead, corporate financing activity has slowed in July, and we expect revenues for the third quarter to be down from the first half 2024 run rate. Turning to investment banking managing director headcount, our approach has not changed, and we continue to target the addition of five to seven MDs annually. We ended the second quarter with 170 managing directors as we remain focused on selectively adding MDs while managing retirements and productivity. We continue to invest in our technology franchise, adding two managing directors focused on financial technology. In addition, we recently announced the hiring of three managing directors to our services and industrials team who will focus on residential and commercial services. They joined 18 professionals based out of our new Birmingham, Michigan location, the majority of whom started during the second quarter. 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 where market conditions improved during the second quarter. High credit spreads, solid investor demand, and increased governmental issuance led to better market conditions. We generated $25 million of municipal financing revenues during the second quarter of 2024, up 22% on a sequential basis. We underwrote 110 municipal negotiated transactions, raising over $3 billion of par value for our clients. Performance during the quarter was driven by governmental issuance in the Midwest and California, as well as solid results from our special district group, which specializes in financing the public infrastructure needs of growing communities. As we look ahead, we believe additional improvements during the second half are achievable as the market continues to improve. Turning to our equity brokerage business, equity markets saw muted volatility during the second quarter as indices ground higher, albeit with limited breadth. We generated revenues of $52 million, up 3% from the second quarter of last year. We traded 2.8 billion shares during the quarter on behalf of over 1,200 unique clients. The breadth of our client base and our daily volume allow us to frequently cross client activity internally, a key differentiator for us in the marketplace. We continue to see client research votes improving as we demonstrate the value of our capabilities. Our expanded scale is winning mind and wallet share with our largest clients, helping to offset the impact from a declining market wallet. With muted volatility, we anticipate near-term results relatively consistent with the second quarter. Lastly, turning to fixed income, we generated revenues of $40 million for the second quarter of 2024, down slightly from the first quarter. Client activity remains fairly muted as market participants wait for more certainty on interest rates. The headwinds in fixed income markets have not yet turned to tailwinds. However, we're optimistic that the markets are improving. We expect near-term results similar to this quarter before a stronger finish to the year. Now, I will turn the call over to Kate to review our financial results and provide an update on capital use.

Thanks, Deb. As a reminder, my comments will address our adjusted non-GAAP financial results. which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. We generated net revenues of $357 million for the second quarter of 2024, an increase of 7% from the sequential quarter and 29% compared to the second quarter of last year, driven by higher corporate investment banking revenues. For the first half of 2024, net revenues totaled $691 million, up 22% year-over-year, again driven by increased corporate investment banking activity, as we continue to benefit from our broad and diverse platform, as well as more accommodative market conditions relative to 2023. Turning to operating expenses and margins, our compensation ratio was 62.9% for the second quarter of 2024, lower compared to the sequential quarter and the second quarter of last year, driven by increased net revenues. For the first half of 2024, our compensation ratio was 63%. Our compensation philosophy remains unchanged, exercising solid operating discipline while balancing employee retention, investment opportunities, and near-term margins. Based on our current outlook, we continue to expect our full-year compensation ratio to be near this level. Non-compensation expenses for the second quarter of 2024 excluding reimbursed deal expenses, were $65 million, an increase of 6% on a sequential basis and down 3% compared to the year-ago quarter. Non-compensation expenses during the quarter were higher compared to our guided range due to elevated legal expenses that were unique to the quarter, as well as increased recruiting and placement fees. On a year-to-date basis, excluding reimbursed deal costs, non-compensation expenses totaled 126 million, or an average of 63 million per quarter. We remain focused on managing the actionable expenses as they are a key driver of operating leverage. During the second quarter of 2024, we generated operating income of 62 million and an operating margin of 17.3%. For the first half of 2024, operating income totaled 118 million, a meaningful increase over the prior year period, highlighting the operating leverage of our platform. Operating margin for the first half of the year was 17%. Our income tax rate was 26.6% for the second quarter of 2024 and 19% for the first half of the year. Income tax expense for the year-to-date period was reduced by $12 million of tax benefits related to restricted stock award vesting. Excluding these benefits, our tax rate for the first half of the year was 29.1%. We continue to expect our full-year tax rate to be within a range of 27% to 29%, excluding the impact from stock vesting. During the second quarter of 2024, we generated net income of $45 million and diluted EPS of $2.52. For the first half of this year, net income totaled $95 million and diluted EPS was $5.31. Let me finish with an update on capital allocations. Our earnings capacity combined with our capital light approach enables us to generate meaningful amounts of excess cash to deploy through share repurchases, dividends, and corporate development. Today, the board approved an 8% increase to our quarterly cash dividend to 65 cents per share. The dividend will be paid on September 13th to shareholders of record as of the close of business on August 29th. During the second quarter of 2024, we returned an aggregate of $20 million to shareholders, primarily through dividends paid. For the first half of the year, we returned an aggregate of $108 million to shareholders through share repurchases and dividends paid. We repurchased approximately 316,000 shares of our common stock, or $58 million, related to employee tax withholdings on the vesting of restricted stock awards. These repurchases more than offset the share count dilution from this year's annual stock grant. We also paid an aggregate of $50 million, or $2.20 per share, to our shareholders through our quarterly and special cash dividends. Our results for the second quarter and the first half of 2024 continue to reflect strong performance relative to our peer set. We remain focused on providing near-term value to our shareholders while continuing to grow our platform. We're strongly positioned to accelerate earnings growth as markets continue to normalize. With that, we can open up the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 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 1 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 James Yarrow with Goldman Sachs.

Good morning, and thanks for taking my questions. Chad, maybe we could just touch on how your bank clients are thinking about the environment for conducting M&A after a number of years of nearly no activity. Are you seeing early signs of more bank M&A discussions, and what do you think we need for more normalization at this point?

Yeah, thanks, James. I would actually say the, you know, the last month or two does feel a bit more constructive. You know, it really doesn't have much to do with the regulatory environment. I think it's as simple as, you know, a lot of small cap banks, you know, the stocks are up, you know, 20, 30 percent and, you know, that feels better. And, you know, obviously we've, you know, been through a tough period of time and, you CEOs got to look out and figure out how to drive value and earnings and consolidation is a big part of that. So I think it's certainly early to make that call, but we've definitely seen a pickup in those conversations. And obviously those deals take time and it's not going to impact this year. But yeah, we feel a lot better about how that's going now.

excellent maybe just keeping on the the bank theme one for you Deb I think we are coming obviously closer to the point of rate cuts after Powell's comments recently could you speak to what you are hearing from banks in terms of their appetite as we move ahead in terms of willingness or desire to immunize balance sheets ahead of lower rates yeah James I would say

There's more discussion. It feels better. I think there's been so many head fakes relative to rate cuts that banks are still a little bit just waiting for almost even a more clear signal before they step in and become more active. So, you know, it's part of the reason for my comments. We said we feel like there's some tailwinds. I mean, that's part of that. It's just a little bit of matter of timing.

Thank you so much.

We will take our next question from Devin Ryan with Citizens JMP.

Hey, good morning, everyone. How are you? Good. Hi, Devin.

Hi. First question, I guess really a two-part on advisory, near-term and maybe longer-term. Just on the near-term, I'd love to get a little bit more color around what you think is driving maybe the positive shift around the edges with sponsor-clients, and whether you're seeing it across all industries or if it's concentrated. And then kind of taking a step back in the longer term, let's just get maybe an update on Piper's advisory coverage footprint today and where you feel like you're lined up against the potential fee pools, meaning where is there maybe still opportunity where you're undersized relative to the fee opportunity? Thanks.

Yeah. Good. Yeah, I would say with sponsors, I mean, I feel a little like a broken record because we've said this the last couple quarters. It's been, you know, slow, steady improvement, and we've definitely seen an uptick, you know, this summer in terms of pitch activity and new proposed transactions. You know, obviously, you never know how much of that's going to make this year or next year, but I still think, Devin, the main driving factor, besides financing getting a little bit better, is just how long in the tooth some of these funds have been without returning liquidity. And I think the longer that time goes on, the more pressure they get from LPs, the more realistic valuations become. And we're certainly feeling that, and there's more funds that are specifically trying to get a particular deal done. What I would say about the sponsor deals, while all that feels good, it's still not super easy at the end of the road when you're trying to close a deal where we used to have multiple bidders at the end of the process. The processes are still thin, but I would say we are now in a functioning private equity deal market. The calendars definitely open up. Pitches are happen more and it's sort of like we said, it's getting better. Relative to your second question about just opportunities, you know, I think the thing we like about our advisory business is just how diverse it is across industry teams. You know, while, you know, we just talked about depositories, while that stays tough, you know, we're doing really well in energy. We've had a nice return in our invested in technology and, you know, seen some, you know, nice announcements there. And I would say, frankly, our first half healthcare has been kind of slow where, you know, 10 years ago, if we were slow in healthcare, that would have had a bigger impact. But, you know, the diversity is pretty good. And we actually think we're going to have a pretty strong back half in healthcare. But I think within each one of these sectors, especially when it comes to the sponsor community. There's sort of tremendous focus on particular areas. And I would just highlight, you know, as an example, the team we just hired in Michigan, you know, they're going to be part of our, you know, diversified industrials and services team. And they specifically spend all their time with sponsors in commercial and residential services. So, you know, that's a pretty small sliver. You know, another area we invested in is, you know, auto aftermarket. That's a small sliver. So I would say within each of these industry groups, this tremendous depth and focus is really important. And there's, you know, there's quite a bit of runway in many of the industry groups.

Okay. Thanks, Chad. That's very helpful.

And then a follow-up here, probably for Deb, just on fixed income brokerage and appreciate participants are waiting for more certainty on interest rates. The backdrop is still relatively challenged, but then I also heard the comment about optimism that the markets are improving. So I just love to, I feel like I've asked this question several times over the last couple of years, but just how we should think about what a more normal level of business is for Piper in fixed income brokerage. Is that 50 million or so a quarter? And then how do you think about the inputs into the algorithm for intermediate term growth off of that. So once we get to something more normal, whenever that happens, what does this business growth look like? Is it mid single digits, upper single digits, or how should we think about the actual growth of the underlying business based on the wallet and then what Piper is specifically doing? Thanks.

Yeah. Great question, Devin. I think, well, you know, it, It's hard to predict the timing of when. I think your $50 million a quarter is really in the ballpark of what would be sort of a normalized fixed income business if there is such a thing anymore. But I would also say then off of that from a growth perspective, we are looking – we've made some hires in municipals and continue to, even though that's been a strength for us, focus on some areas, maybe softer yields just below IG and having increased – capabilities there, as well as leveraging more technology. We're also looking at and have not yet completed everything we'd like to do relative to growing out structured credit, sort of the non-government back to the RMBS, ABS, CLO, those types of products. We also think we have significant opportunity in loan strategies where we have strengths there, but see the opportunity both with our bank coverage and in particular, even the non-bank coverage to do more there. So those are areas of focus that we're looking at as we move forward.

Okay, terrific.

And then I just had one last question here. I received a question just around kind of the back half guidance for the M&A advisory business. I believe it sounded like, you know, third quarter should be similar to second quarter with maybe a little bit of upside and then fourth quarter, you know, hopeful that, that could improve further. But, but I just, again, based on what you guys are seeing today, I want to make sure we understand how you're framing kind of the back half of the year. Thanks. Yeah.

You know, I would say Devin, where you're at, we're at that difficult point in the year where like I said, the, the, new pitch activity with sponsors and others has been, you know, really, really good this summer. But you never know when you're going to start those processes and you never know exactly how many are going to close end of year early next year. You know, obviously we have, you know, visibility into how July closing started. And so, you know, we made the comment that Q3 will look, you know, for advisory a lot like Q2. obviously that's still up nicely over last year. And yeah, and then the big question becomes just how good is Q4? I would say relative to last year and, you know, just relative performance, we had a very strong Q4. So, you know, we recognize it's a difficult comp. But, you know, like we said, business is absolutely improving with the pitch calendar. And if the pace, you know, stays like it is, you know, we feel good about that.

Okay, that's great. Thanks. I appreciate the extra color.

We will take our next question from Brendan O'Brien with Wolf Research.

Good morning. Thanks for taking my questions. I guess to start, I just want to talk about the avidity acquisition. You know, there's a clear gap in your product offering. And while the business may not have a material impact on near-term earnings, it is clear that you could see significant synergies plugging the business into your sponsor coverage platform. So I just wanted to get a sense as to how large of a business this could become for you over time. And then separately at this point, do you see any significant gaps in your product offering that you would maybe look to do another acquisition for, or do you expect acquisitions moving forward to look more like the DBO deal?

Yeah, I'll take Avidity first. Yeah, we're very excited about this. I mean, it's something I and others at the firm have been looking at, you know, for a long time, met a bunch of firms. I think one of the things we like about Avidity is just quite a bit of overlap with the PE community in the middle market where we spend a lot of time. I mean, there's lots of capital advisory in tangential areas, but, you know, these guys do capital raising really in our sweet spot. And, you know, it's already just been fun with lots of good private equity clients to kind of share the stories and talk about the opportunities. And, you know, you can see it on both sides. Like, can we move the needle on particular new primary capital raisings for them, you know, to have access to our full advisory team? You know, absolutely. Can they move the needle for us? I mean, some of these funds, you know, they've been working with for many years. They've got relationships at the top of the house, so they can move the needle on, you know, helping us win particular advisory business. And I would say that is all before you even talk about, you know, secondaries and continuation vehicles, which we are, you know, really, really excited about and, frankly, have already, you know, started to line up some of those opportunities. So, you know, It's only 45 people. It likely doesn't close till end of Q3, early Q4. So it's not going to make a big impact on numbers this year. But we're really excited about just how well this aligns with our core focus on PE. And then, yeah, I would say when it comes to other acquisitions, the larger our advisory platform has gotten and the you know, it's broader across industries, it gets harder to find the really big stuff. You know, we would love, love to do another Sandler type deal. But, you know, for the most part, we're still seeing plenty of, you know, 50 person boutiques, you know, in areas where we've got, you know, not a lot of penetration. So I think tech and software, frankly, we're doing quite well with some of the DBO stuff, particularly in security and cyber. And I think there's a lot more we can do there. So there's plenty of stuff like that on the roadmap.

That's a great color. And then I guess for my follow-up, I wanted to touch on the election and specifically how a more accommodative FTC could impact activity levels in your view, especially within the bank sector, and also on the sponsor side, where I know there's been some challenges within the healthcare space.

Yeah, I mean, I think it's hard to argue that if, you know, we had an administration change that, you know, we wouldn't see quite a bit of change with sort of some of the regulations. So, you know, you can never predict that, but, you know, I'd be pretty optimistic that would be good for our depository business and, you know, good for several of our industry teams. I mean, we've seen, yeah, we've definitely seen some stuff, you know, relative to regulation and deal review, you know, in some parts of our strong sectors like healthcare, you know, that's quite a bit different than the scrutiny we saw, you know, 10 years ago, say. So I do think that would be a positive for our M&A business.

Great. Thank you for taking my questions.

We will take our next question from Mike Grondahl with Northland Securities.

Hey, thanks, guys. Hey, one more question, Chad, on Avidity. The 11 MDs you're picking up, how do we think about, you know, sort of average fee or revenue per MD kind of compared to like the Piper Investment Banking average. Any color there, just how we should think about that?

Yeah, I think it actually, Grundy, it fits pretty well with our, you know, overall averages. I think with where we want to get, you know, in the long term, you know, I think at the starting point, you know, in our troughs, you know, the Productivity is probably closer to five, which is where we'd be starting out probably for next year. But we see the same opportunity to grow productivity just based on the combination and synergies. But that's going to take some time.

Got it. And then just jumping back to M&A quick, how would you say your visibility is? into 4Q has changed over the last three months. I mean, has it gotten a lot better, a little bit better? Just maybe a little color there would be helpful.

Yeah, again, I mean, I, you know, obviously when you ask, if people ask this question in, you know, February, March, April, it's almost impossible to answer. It gets a little easier as you get to the summer. But you've got to remember, there are certain things that are going to close in Q4 that we haven't even started yet. I mean, there's pitches happening and trying to figure out with those teams, are we going to launch right away so we can close in November, December? Are we going to launch after Labor Day? Are we going to wait for the election? So our visibility is definitely better, but we're not going to come out and make some big claim on Q4.

Got it. Got it. That's helpful perspective.

Hey, thanks and good luck the rest of the year. Thanks, Mike.

We will take our next question from James Yarrow with Goldman Sachs.

Thanks for taking my follow-up. Chad, I think IPOs have improved somewhat less than I think we might have hoped year-to-date. Could you offer some detail on what you're hearing today that's holding back IPOs? I guess how that's changed year-to-date and then Maybe any sort of context on what your backlogs look like, let's say, versus, let's say, at the beginning of the year.

Yeah, I'm glad you asked the question on ECM. I mean, obviously, we made some commentary that Q3 will be a little softer than the first couple quarters. Obviously, ECM changes really quickly, so I can't really predict what it's going to be like in September. But for us, we're very weighted to healthcare and biotech. And certainly in, you know, the end of June and July, you know, that market has slowed. You know, we're still doing plenty of financings when there's sort of big catalysts, but just, you know, opportunistic financings, we were seeing a lot more of that in the first half in biotech, and we're not quite, you know, seeing as much there. I would say relative... And I think if you just look at the overall ECM fee pool, I think July across the market is the first month that probably wasn't up over last year. And, you know, the first six months were. And so, you know, obviously for us, the first six months were better than July. But, you know, I don't, August is always a difficult month. You know, and then when there's any market volatility in August, people just wait. So we don't have tremendous visibility into that. I do feel like just getting past an outcome in an election, people always sort of ask us how that's going to impact. No matter what happens, just putting that behind us will make for a better Q4 for ECM. But I agree with you. We are seeing some of the very largest IPOs we have in backlog, the very strongest sort of profile. Those all are teeing up and are ready to go. But they haven't decided are they going to go right after Labor Day or right after the election. So there's definitely a pickup coming there, but it's not going to be this summer.

Okay, that's really helpful. Maybe just one last one for Kate. I think you demonstrated robust non-comp discipline once again, but maybe you could just speak to the longer-term inflationary dynamics for non-comp costs as we look ahead into the back half and 2025 and any changes to the guidance there.

Sure. Thanks, James. So you're right. While there are inflationary pressures that we're facing, particularly in spaces like data comp fees and market data services and a little bit on the T&E front, you know, our guidance really remains unchanged for the near term here at $62 million a quarter, of course, X those reimbursable deal expenses. You know, we are constantly evaluating opportunities to be more disciplined, more efficient there. But we are seeing that as I think the peer set is as well So again, we'd reiterate the 62 million for the near term here But we are seeing those categories that will be really focused on and we'll be sure to update the group should that guidance change Thanks for the thoughtful answers to all my questions Thank you We do not have any further questions I would like to turn the call back over to Chad Abraham for closing remarks

Thank you, operator, and everyone that joined. We very much look forward to updating you on our third quarter results. Have a great day.

This concludes today's call. Thank you for participation. You may now disconnect.