PJT Partners Inc.

Good day and welcome to the PJT Partners third quarter 2020 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sharon Pearson, head of investor relations. Please go ahead, ma'am.

Thank you very much, Jake. Good morning and welcome to the PJT Partners third quarter 2020 earnings conference call. I'm Sharon Pearson, head of investor relations at PJT Partners. And joining me today is Paul Taubman, our Chairman and Chief Executive Officer, and Helen Mates, our Chief Financial Officer. Before I turn the call over to Paul, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those in these statements. We believe that these factors are described in the risk factors section contained in PJT Partners 2019 Form 10-K, which is available on our website at pjtpartners.com. I want to remind you that the company assumes no duty to update any forward-looking statements and that the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance. For detailed disclosures on the long gap metrics and their gap reconciliations, you should refer to the financial data contained within the press release we issued this morning, also available on our website. And with that, I'll turn the call over to Paul.

Thank you, Sharon. Good morning, and thank you all for joining us today. We're pleased to report record results for the quarter and for the nine months. In the third quarter, firm-wide revenues increased 71%, from year-ago levels to $298 million, while adjusted pre-tax income grew 127% compared to a year ago. Each of restructuring, PJT Park Hill, and strategic advisory delivered strong performance in the quarter, with revenues in each business higher than a year ago. For the nine months, firm-wide revenues grew 56%, to $730 million, exceeding our full year 2019 revenues. Adjusted pre-tax income increased by 122% from year-ago levels to $171 million. These results reflect the unique depth and breadth of our franchise and highlight our differentiated ability to navigate challenging market environments. When we reported our first quarter results, we were appropriately cautious about the remainder of the year. Since then, we have grown ever more optimistic about the full year. Our strong momentum and strategic advisory heading into the year, combined with a balanced business model with leading pillars in restructuring, capital markets advisory, and shareholder engagement, has enabled us to gain market share in these turbulent times. Increasingly, clients are gravitating to our demonstrated track record of delivering superior advice. Our extraordinarily talented team combined with our distinctively collaborative culture has enabled us to serve clients in a superior manner and produce exceptional results. Now, turning to each of our businesses in greater detail. Beginning with restructuring. Revenues in our global restructuring business were up sharply for the quarter and for the nine months compared to comparable periods a year ago. The ever-increasing collaboration between restructuring and the rest of our firm enables us to leverage our collective expertise, consistently delivering exceptional results for our clients. During a market backdrop characterized by economic contraction dislocations and disruptions, our team has excelled. While the pace of new restructuring activity is likely to slow in the near term, we expect it to remain elevated relative to historical levels. There are a significant number of companies and industries whose businesses have been meaningfully and in some cases permanently compromised by dislocations caused by the pandemic. Accordingly, we expect to see an active restructuring environment for the foreseeable future. Turning to PJT Park Hill. While this business was significantly impacted at the onset of the global pandemic, it has rebounded more quickly than expected. The fundraising environment continues to normalize, as market volatility has subsided and investors have become increasingly acclimated to virtual rather than physical due diligence. With respect to PJT Park Hill, our ability to bring to market in-demand fund managers has been a competitive advantage in what can best be described as a flight to quality environment. In PJT Park Hill, third quarter revenues increased significantly versus year ago levels, and nine month revenues are essentially unchanged relative to last year's levels. We expect sequential growth in revenues in the fourth quarter, although we anticipate PJT Park Hill's full year results to fall short of last year's results. Turning to strategic advisory. In strategic advisory, we enjoyed another strong quarter. Year-to-date strategic advisory and restructuring have been the firm's growth drivers. Despite the global pandemic and corresponding economic shutdown, our announced transaction count increased by 25% in the six months ended September 30 versus year-ago levels. However, The aggregate value of these transactions was down significantly compared to year-ago levels. Beginning in the third quarter, we started to see a significant uptick in strategic dialogues and number of new mandates. Our pre-announced backlog continues to build and now is above year-ago levels. We remain committed to investing in our strategic advisory franchise. Year to date, we have hired five new partners to our strategic advisory team in activist defense, technology, real estate, and energy. And has been the case since we started our firm, we continue to be an employer of choice for talented individuals at all levels. Now, over to Helen to review our financial results in greater detail.

Thank you, Paul. Good morning. Beginning with revenues, total revenues for the quarter were $298 million, up 71% year-over-year. The breakdown of revenues, advisory revenues were $262 million, up 80% year-over-year, driven by a significant increase on restructuring revenues, as well as an increase in strategic advisory revenues. Placement revenues were 32 million, up 24% year-over-year, driven by an increase in fund placement activity for private equity firms. For the nine months ended September 30, total revenues were 730 million, up 56% year-over-year. The breakdown of nine-month revenues, advisory revenues were 612 million, up 59% year-over-year, driven by significant growth in both restructuring and strategic advisory. Placement revenues were 106 million, up 37% year-over-year, driven by increases in both corporate private placement activity as well as fund placement activity. Turning to expenses. Consistent with prior quarters, we have presented the expenses with certain non-GAAP adjustments. These adjustments are more fully described in our 8K. First, adjusted compensation expense. Adjusted compensation expense continues to be accrued at 65%. This ratio represents our current best estimate for the compensation ratio for the full year. Turning to adjusted non-compensation expense. Total adjusted non-compensation expense decreased modestly to $28 million for the third quarter compared to $29 million for the prior year. We have continued to experience a significant reduction in travel and entertainment expense as a consequence of the global pandemic. This reduction was partly offset by an increase in other expenses due to a variety of factors, the largest of which relates to charitable contributions supporting both COVID-related relief and the advancement of racial equity. For the nine months, total adjusted non-compensation expense decreased 8% to $85 million compared to $92 million for the prior year. Turning to adjusted pre-tax income. We reported adjusted pre-tax income of 76 million for the third quarter, up significantly compared with 33.5 million for the same period last year. And for the nine months, we reported adjusted pre-tax income of 171 million, more than double the 77 million last year. Our adjusted pre-tax margin was 25.5% for the third quarter, compared with 19.2% for the same period last year, and 23.4% for the nine months compared with 16.4% for the same period last year. The provision for taxes, as with prior quarters, we've presented our results as if all partnership units had been converted to shares and that all of our income was taxed at a corporate tax rate. We've also annualized the benefit relating to the delivery of vested shares during the first quarter. Our effective tax rate for the full year is expected to be 25.6%. This rate is slightly lower than our previous estimate to reflect lower anticipated state and local taxes. Earnings per share, our adjusted if converted earnings were $1.36 per share for the third quarter, up significantly compared with 60 cents in the third quarter last year. And for the first nine months, $3.10 per share, up significantly compared with $1.39 per share in the same period last year. Share count. For the quarter, our weighted average share count was 41.5 million shares. During the quarter, we repurchased the equivalent of approximately 494,000 shares through open market share repurchases, as well as the exchange of partnership units for cash. Our total repurchases in the first nine months total approximately 1.7 million, including the exchange of approximately 606,000 partnership units for cash. We're currently in receipt of exchange notices for approximately 1.1 million partnership units. As we have done in the past, we will exchange these units for cash. On the balance sheet, we ended the quarter with our highest cash balances ever, with $367 million in cash, cash equivalents, and short-term investments, and $323 million in net working capital, and we have no funded debt outstanding. Finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on December 16, 2020, to Class A common shareholders of record as of December 2, 2020. And with that, I'll turn back to Paul.

Thank you, Helen. Looking ahead, earlier this month, we celebrated our fifth anniversary as an independent, publicly traded company. From day one, we had a simple vision for PJT. a firm that would deliver best-in-class advice to decision-makers worldwide, forged by a culture of excellence, collaboration, and integrity. We had a clear view of the investments we would make to build our firm and confidence that these investments would pay off big and ultimately be reflected in our financial results. Throughout this journey, the progress we clearly saw occurring on the inside was not always apparent on the outside. But after five years of consistent value-added investment and a growing track record of results, our strategy and progress to date are now far better understood and appreciated. We've always said the longer the lens, the greater the clarity of vision we have for our business. Clearly, 2020 is shaping up to be an extraordinarily strong year for our firm in both absolute and relative terms. While it is premature to present the 2021 outlook, we remain extremely confident in our future growth prospects when measured over the next few years and beyond. And with that, We will take your questions.

Ladies and gentlemen, if you would like to ask a question, you can signal by pressing star 1 on your telephone keypad. Do keep in mind, if you're using your speakerphone, please make sure your mute function is released to allow your signal to reach our equipment. Once again, for questions today, star 1. We will begin with Devin Ryan with JMP Securities.

Great. Good morning, everyone.

Good morning, Devin. Good morning.

Maybe to start here to dig a little bit more around the tone of M&A right now and what you guys are seeing, I'm just curious how you would frame some of the key drivers supporting activity right now and whether this is more of a resumption of just business as usual as companies have now at least dealt with the immediate impacts of the virus or is there something else occurring, whether it be strategic decision-making is accelerating because of the pandemic or something else. Just trying to think about what's driving kind of this resumption in activity that we're seeing very strong right now.

I think the way we think about it is we go back to the beginning. And what we have said for a number of years now is we believe that there is a secular shift to more M&A in almost any environment. And that while M&A is always going to be a deeply cyclical business, that the secular trends are all else equal, more M&A at any given set point. And what we've consistently said is the reason for that is as the world speeds up and there's more innovation, more technological disruption, to business models, companies can no longer stand still and need to more actively manage their portfolio to either acquire skills and capabilities to fortify them, to leave certain markets because they no longer have a competitive advantage. What the pandemic did, it's a health crisis, it's a terrible health crisis with enormous economic ripples. And what it did in the very, very short term is it froze all strategic activity. But as the waters, you know, which kept rising and rising and rising, you know, stopped rising and stabilized, I think for many companies who were able to get to higher ground, they now look at their businesses and they see that many of the trends that were in evidence before the pandemic are now in evidence, but to a magnified extent. Where the trends pre-pandemic are the same trends, but significantly accelerated. And that's what we see. And that's why we've always had conviction that once the companies were able to ensure that they had adequate liquidity, that they had right-side their business for the new reality, that they had dealt with immediate needs, that they were going to step back. And if they were damaged by the economic dislocations, they were going to figure out strategically what to do about it. And if they were strategically advantaged by it, they were going to figure out how best to take advantage of their fortunate position. And that's what we're seeing.

Okay. Uh, thanks Paul. Appreciate the color there. Um, uh, maybe question on the, uh, pre-tax margin potential. You hit 25% plus in the quarter. Um, the best level the firm's been at, um, obviously strong revenues, uh, and non-comp tailwinds, um, helped there. Um, you know, comp, um, you've helped the comprehensive study as you typically do. If you're trying to think about, um, margin potential from here now that you're already kind of into that zone where some of the industry has been in kind of better years and contemplating kind of the comp ratio as well, kind of what type of flexibility you see there given that you really haven't given any indication here year to date just given how you guys accrue through the first nine months. Just trying to think about margin potential to the extent we were to extrapolate a view that revenues can remain solid from here.

Well, I'm optimistic about the revenue outlook as we look out over years because we continue to build the business, we continue to attract talent, the brand is increasingly well-known, and I think we have so much potential ahead of us. So that is certainly... how we see the world. On the cost side, we've said from day one that we have a cost structure that is the equivalent, if not advantage, relative to others, but that you only see that over time as the business is built out and you get operating leverage through the revenues. We've always said it was more the revenues that needed to grow, not that the expenses were out of line. I think you've seen that as our non-comps as a percentage of revenues have increasingly, or sorry, not increasingly, but have consistently come down. I am reluctant to talk about normalization when we're in the midst of an environment that is anything but normal and a world where no one is traveling. everyone is remoting in is not necessarily the place to start to then extrapolate as to where we go. But if you look to where we were pre-pandemic, we had a track record of steadily increasing the margin year to year to year. And from that pre-pandemic level, I certainly would expect us to continue to do that.

Okay, terrific. Last quick one here just on the cash position. Obviously, it's continued to build, strongest you've ever had. I think it's about $9 a share of cash equivalents. Just would love some perspective around how you guys are thinking about just that cash position as obviously it continues to build and understanding that you're also a capital white model. Just trying to think about how you guys are contemplating that building position today.

Well, first of all, the cash traditionally builds throughout the year because we have year-end compensation obligations to pay our people. So you always need to look at those numbers really on a net basis. There's a gross cash number, and then there's commitments that we have, which are on the balance sheet, but no matter how you look at it, it has grown more quickly this year than any other year. At this time of the year, it's higher than it's been at an equivalent time in prior years, and it's higher than it's been relative to even the fourth quarter. But I think we've already signaled that we're going to take our excess capital and prudently manage dilution. And Helen talked about the fact that we've already committed to spend a sizable amount of cash to repurchase 1.1 million partnership units. I think that gives you a sense as to where our collective heads are at, and that's consistent with how we've always operated the business. But we do like the fact that in uncertain times, We have such strength and stability, and we're always going to be conservative financial stewards, but we also believe deeply in the currency, and we're going to do everything we can to prudently manage the issuances which relate to investment. So I think that philosophy remains unchanged.

Great. Thanks, Paul. I'll leave it there.

Thank you, Devin. And now we will move to Richard Ramsden with Goldman Sachs.

Good morning, guys. So I wanted to dig a little bit more into the restructuring business. So I guess a couple of questions. The first is, Paul, I think if we go back a few years, you said that restructuring I think was probably about a third of the advisory revenue pool. I know you set us up sharply this quarter, but if you look at the contribution of restructuring today – Is it significantly different from the third that you talked about, I think, in 2016? I know obviously a lot has changed in terms of the business mix since then. And then secondly, I think you said you expected that the pace of restructuring is going to slow a little bit from here. Could you just expand a little bit as to why you think that is the case? Is that just availability of financing? Is it because a lot of the mandates have actually already happened? If you could just expand on your expectations of the slowdown, that would be helpful. Thanks.

I appreciate the question because it gives me an opportunity to sort of amplify my comments. If you go back and listen to what we've said earlier in the year, we saw this as concentric circles with a number of ways of restructuring. And the first were companies whose business model was essentially shut down by the pandemic. No revenues, no customers, no cash coming in, dealing with extreme circumstances. And that was an extraordinary number of mandates that which came to us and into the industry in the months of March, April, and May. That is not a normal environment. That's not even an elevated environment. That is extreme circumstances where business models are upended literally overnight. There's a tremendous amount of activity there that will work its way through the system but most of that relates to businesses that were immediately turned off from a revenue perspective on day one. What we've said from day one, however, as a companion point, is that the damage done by this economic crisis is going to be long-lasting. The changes in consumer behavior The changes in activity levels are going to leave certain businesses and industries severely and potentially permanently compromised. And we've also said that even if there is robust alternatives in the capital markets in the near term, there's a limit to how much debt you can put on to keep a challenged business operating indefinitely And at some point, those businesses need to be restructured. And then we've also said there are other companies and industries that might not be on the collective radar screen in the near term. but are highly dependent upon companies that are more deeply affected. And as all of this works its way through the system, there's likely to be yet another wave. So that's really what I'm talking about. We're dealing with extraordinarily high levels of restructuring activity at the onset of the pandemic. That activity continues. Many of those companies are continuing to restructure their balance sheets, whether it's in court, out of court, liability management, And then there are a large number of companies who have been deeply affected by this and who may have had highly geared balance sheets coming in, but now are inevitably going to have to deal with major restructurings of their businesses. But that may take time to present itself.

Okay. All right. Well, thank you. That's very helpful. And then secondly, there's obviously been a lot of discussions around changes to the tax code, so specifically an increase in capital gains tax, potentially depending on who wins the election. Has that had any impact in terms of pulling forward mandates from financial sponsors from next year into this year, or would you say it's been inconsequential?

I think it's been quite significant. quite modest. I think everyone talks about it, they see the potential coming, but very few people are really prepared to act. And then if you also go back in time a little bit, in order to sell businesses and have it be in this tax year, you make that determination much earlier. You typically don't wake up in September and say, I'm now just going to go sell my business and run a compressed process just to get it done in this year. You might do it with your stock portfolio, which is quite liquid. It's much more difficult to do strategically. And if you go back as to when people might be planning for this, I think the views about whether there would be a change in tax policy were probably quite different in terms of conventional wisdom. then they may be a week before the election. And who knows where they'll be seven or eight days from now as well. So I think to the extent that was something that companies and families would have been thinking about, we didn't see that much of it earlier in the year. And I think at this point, no one knows that. whether or not something happens next year, if there is a tax increase, is it retroactive to the first of the year or not? So there's so much uncertainty about all of this that I suspect you're going to look back, and there may be companies, if there is a tax increase, who will question whether they should have started a process earlier, but I just have not seen a significant pull forward.

Okay. All right. Thank you very much for taking my questions.

Absolutely. Thank you, Richard.

We will now move to a question from Steven Chewbacca. Please go ahead.

Hey, good morning. So I wanted to add on the advisory outlook, parsing some of the remarks that you made with regard to the take you're seeing in strategic dialogue. You guys have been a bit outlier in coming into COVID. You probably came in with the strongest backlog. It certainly means your year-to-year revenue gain has been highlighted to the peer. At the same time, the public backlog for you guys appears to be the one where your peers have seen some improvement, albeit not much lower than this. I'm curious if the public backlog in year-to-year or some of those trends representative of what you're seeing in this, given some of the constructive comments you made about the updated strategic dialogue.

Okay, Stephen, I'm going to take a shot here, because you may not appreciate this, but your phone connection is quite garbled, as my son was saying. Oh, sorry about that. Okay.

I'm actually on landline, too, so my apologies. Okay.

I think I caught most of it, and if I could summarize, I think you were just trying to parse our comments about strategic advisory and asking about public database backlogs and all of that. Is that a pretty good summary of what you asked?

That's a great summary.

Okay. Well, first, I have to confess, I don't look at the public database summary, so I don't even know what they say. And I have no comment on it because I don't think I've ever asked to see a public database summary of backlog. That's not how I think about the business or manage the business. We literally do this from the bottoms up. which is we're just focused on serving our clients, that if we have the right bankers and we have the right advice and we put the right team in front, that ultimately our shift will come in. And I never want to think about, gee, we need three more deals this week or this quarter. But if you have enough dialogues with the right bankers calling on the right companies, inevitably – you get calls to come to the boardroom and the next thing you know, you're incredibly stretched. So we live in an idiosyncratic business where depending upon the company that we're talking to, where our relationships are, how active they are, they may be incredibly active and then decide to go pencils down on something and then things pick up. So what I will say is to reiterate my comments, The second and third quarter is a pretty good benchmark of kind of the new unfortunate normal. So no one can really tie when the world shut down, but March 31st is a pretty good rounded date of the second and third quarters. What I said was really three things. Number one, we announced 25% more transactions in that six-month period than we did a year ago. but they were meaningfully smaller transactions than a year ago. And that's what's publicly known and available. What is more important to me is as the waters began to recede a little bit and as companies got to higher ground and they were able to shore up their liquidity as they began to come to grips with this unfortunate new normal, we began to see a very significant uptick in strategic dialogue at the end of the second quarter, so rounding into the third quarter. So somewhere in July, we began to see a significant uptick in activity, and the focus really shifted from the world is on fire, and we need to tend to all these companies that have overnight liquidity issues, liability management issues, potential restructurings, we shifted back to we have a very significant demand to talk about strategic situations, transactions, and they were either from companies who are looking to play offense as well as companies who now are deciding that maybe they don't have the right balance sheet and the right business model to succeed going forward. And that backlog has consistently steadily built In the months of July, August, September, October, and presumably will continue. If the trend persists into November and beyond. And we now sit in a better place than we did a year ago. But how all of this presents itself and reveals itself publicly. You know, week to week, quarter to quarter. I have no idea, but I know that the longer the lens. If we're having these many dialogues and these many high-quality mandates and assignments, what I know is good things will ultimately happen.

Great. No, I appreciate all that context, Paul. And just one more for me on the backdrop.

Steven, you're still glitching. Do you want to try one more time?

Okay. If I'm still glitching, I'll just follow up later on that.

Okay, well, apologies for that. So when I talk about a world of technological disruptions and dislocations, we've had clear evidence of it from Stephen's phone line. But I do sincerely wish everyone that they are able to navigate these difficult times in a safe and sound manner and that everyone can remain and that sooner rather than later we can all resume a more normal interaction with all of you. But in the interim, we'll do our part to remain accessible virtually to our shareholders, and we will speak to you on the next earnings call. Thank you very much.

Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation. You may now disconnect.