Piper Sandler Companies (NYSE:PIPR) Q2 2023 Earnings Call Transcript

Piper Sandler Companies (NYSE:PIPR) Q2 2023 Earnings Call Transcript July 28, 2023

Piper Sandler Companies beats earnings expectations. Reported EPS is $2.47, expectations were $1.15.

Operator: Good morning, and welcome to the Piper Sandler Companies’ Conference Call to discuss the Financial Results for the Second Quarter of 2023. During the question-and-answer session, securities industry professionals may ask questions to management. The company will make forward-looking statements on this call 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 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. At this time, I would like to turn the call over to Mr. Chad Abraham. Mr. Abraham, you may begin your call.

Chad Abraham: Good morning, everyone. Thanks for joining us today to talk about our second quarter results. I’m here with Deb Schoneman, our President, and Tim Carter, our CFO. In a challenging second quarter of 2023, Piper Sandler generated adjusted net revenues of $277 million and adjusted EPS of $1.13. Activity across most of our businesses continued to be muted as a cloudy economic outlook has kept many clients and transactions on the sidelines, waiting for the inflection point to better market conditions. We remain focused on helping our clients navigate a highly dynamic economic landscape. When markets stabilize, we expect activity levels to accelerate and we believe that we are strongly positioned to help our clients transact across our various product and business lines.

Turning to corporate investment banking. We generated revenues of $167 million during the second quarter of 2023, flat compared to the first quarter. Highlighting the benefits of our diversified product and industry set, increased corporate financing activity offset a decline in advisory service revenues for the quarter. Specific to advisory services, revenues of $130 million for the quarter reflect the continuing challenges in the M&A and debt markets. We completed 61 advisory transactions during the quarter. Performance was led by our healthcare group with solid contributions from our energy and power and restructuring teams. The decline in our advisory activity for the quarter was largely driven by a market-wide reduction in bank advisory transactions.

The outlook for bank M&A over the next six months remains challenging, negatively impacted by company and portfolio valuations, a lack of clarity around credit quality and an uncertain regulatory capital framework. However, the longer-term outlook for consolidation and capital markets activity in the depository space is compelling, and our market-leading bank franchise is well positioned to advise clients when the market improves. Overall, our performance on a relative basis remained solid. Completed U.S. M&A market activity is down approximately 50% compared to the first half of last year, while our revenues are down 29%. On a year-to-date basis, we maintained our ranking as the number two advisor on announced U.S. M&A transactions under $1 billion.

Importantly, the outlook for M&A is improving. We have a number of larger announced deals expected to close in the second half of this year as well as a strong pipeline of deals that have kicked off the sale process. We expect advisory services revenues for the second half of 2023 to be better than the first half. Turning to corporate financing. The equity financing market improved during the second quarter with lower volatility levels and an increase in investor demand for new issuance. However, activity continues to remain below historic levels. For context, 21 IPOs priced in the market during the second quarter of 2023 compared to an average of 102 IPOs per quarter for the last five years. We generated $37 million of corporate financing revenues during the second quarter of 2023, up on a sequential basis.

We completed 24 equity and debt financings, raising $5 billion in capital for corporate clients. Activity was driven by our market-leading healthcare franchise, which ran the books on all 14 deals completed during the quarter, including one of the largest biotech IPOs in history. Highlighting our strong relative performance, on a year-to-date basis, our economic fees from sub $5 billion market cap companies increased approximately 200% compared to a 30% increase in the fee pool for this market. In addition, we ranked as a top five investment bank based on a number of book run deals for healthcare companies with less than $5 billion of market cap. As we look ahead, we expect financing activities to continue building as we progress through 2023.

Turning to investment banking managing director head count. MD headcount remained flat sequentially, finishing the quarter at 171 managing directors. We added two MDs during the quarter, one to continue growing our real estate team and one to further expand our restructuring practice. These additions were offset by planned attrition. We remain focused on strategically managing headcount and driving productivity, while at the same time continuing to strengthen our sector coverage and product capabilities to ensure we have the resources to execute against market opportunity as conditions improve. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.

Deb Schoneman: Thanks, Chad. During the second quarter of 2023, our public finance business generated $17 million of municipal financing revenues, flat compared to the first quarter. Market conditions remain challenging with higher nominal rates, interest rate volatility, and weak investor demand. For the quarter, we underwrote 109 municipal negotiated transactions raising $2.4 billion of par value for our clients. Our results continued to be disproportionately impacted relative to the overall market issuance due to our meaningful presence in the high yield sector and our middle market focus within the governmental business. As we look ahead, our pipeline is large and diverse. We have several significant high quality transactions scheduled for the second half of this year and a number of high yield issuers looking to raise capital.

As a result, we expect revenue generation to improve modestly during the second half of 2023 with additional upside if there is increased demand for the high yield offering. Moving to our equity brokerage business. We generated $50 million of revenues for the second quarter, down modestly from the first quarter. Equity markets experienced lower volatility which moderated volumes as well as our results. We traded 2.7 billion shares during the quarter on behalf of our clients, down 4% sequentially relative to a 9% decline in market volumes. Client research votes and affirmation of the quality and capabilities of our platform continued to increase, and we see opportunity for further market share gains in this business over time. However, with the expectation of reduced volatility in the near term, we expect our equity brokerage revenues in the second half of 2023 to be consistent with the first half.

Moving to fixed income. Market conditions continued to be challenging. The yield curve inversion grew steeper during the quarter keeping investors on the sidelines awaiting more clarity on when the Fed will end its interest rate tightening. For the second quarter of 2023, we generated revenues of $37 million, down compared to the first quarter. The breadth of our client relationship and product capabilities provided some level of resiliency to our results. Asset managers and public entity clients were active as they found relative value in the short end of the yield curve. Trading among our depository clients remained slow as they continue to focus on building liquidity and evaluating our capital and funding position. Advising clients on hedging strategies drove an increase in derivative activity, and we remain active assisting clients with loan sales.

While we expect the near-term outlook to remain challenging, we anticipate more clarity on interest rates as the year progresses, which should provide a turning point to more constructive fixed income markets. Like our investment banking group, we remain focused on broadening our fixed income platform. Our recruiting pipeline is active, and we see opportunities to continue expanding our market reach. We believe we are well positioned to gain share and assist clients when market conditions improve. Now, I will turn the call over to Tim to review our financial results and provide an update on capital use.

Tim Carter: Thanks, Deb. Before reviewing our non-GAAP financial results, let me highlight an item impacting our GAAP results this quarter. Consistent with all prior periods, our GAAP results include restructuring and integration costs related to acquisitions and/or headcount reductions. For the second quarter of 2023, our GAAP results include $4 million of restructuring expenses associated with headcount reductions as well as vacated leased office space related to our previous acquisitions. Now, let me turn to 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 $277 million for the second quarter of 2023, down 4% from the sequential quarter and 20% from the second quarter of last year.

Consistent with the first quarter of this year, market conditions during the second quarter remained difficult for most of our businesses. Corporate investment banking revenues were flat on a sequential basis and continued interest rate uncertainty has kept many of our fixed income and public finance clients on the sidelines. For the first half of 2023, net revenues totaled $567 million, down 20% year-over-year. That said, our diversified platform is generating solid operating results. We continue to manage the business to reflect current market conditions, while balancing our strategic objectives of growing the long-term earnings capacity of our platform. Turning to operating expenses and margins. Our compensation ratio for the second quarter of 2023 was 63.8%, slightly higher compared to both the sequential quarter and the second quarter of last year, driven by lower net revenues.

For the first half of 2023, our compensation ratio was 63.6%. We continued to maintain our philosophy of managing compensation levels to be a balance of employee retention and investment opportunities, while delivering operating margins and shareholder returns. Based on our current outlook, we expect our compensation ratio to be around a year-to-date level for the remainder of the year. Non-compensation expenses for the second quarter of 2023, excluding reimbursed deal expenses, were $67 million, an increase of 12% on a sequential basis and 11% compared to the second quarter of last year, primarily due to the write-off of a receivable in our public finance business. On a year-to-date basis, excluding reimbursed deal costs, non-compensation expenses totaled $126 million or an average of $63 million per quarter.

Looking ahead, we expect our non-compensation costs, excluding reimbursed deal expenses to be around $62 million per quarter, in line with previous guidance. During the second quarter of 2023, we generated operating income of $26 million and an operating margin of 9.5%. For the first half of 2023, operating income totaled $67 million and an operating margin of 11.9%. Our income tax rate was 18.2% for the second quarter of 2023 and 2.1% for the first half of the year. Income tax expense for the year-to-date period was reduced by $15 million of tax benefits related to restricted stock vestings. Excluding these benefits, our year-to-date tax rate was 25.3%. We expect our tax rate for the second half of 2023 to be within our range of 27% to 29%, excluding the impact from stock vestings.

During the second quarter of 2023, we generated net income of $20 million and diluted EPS of $1.13. For the first half of this year, net income totaled $63 million and diluted EPS was $3.49. Let me finish with an update on capital allocation. We remain committed to returning capital to shareholders through market cycles. During the second quarter of 2023, we returned an aggregate of $16 million to shareholders, primarily through the quarterly dividend. For the first half, we returned an aggregate of $128 million to shareholders. On a year-to-date basis, we repurchased approximately 447,000 shares of our common stock, or $64 million which more than offset the share count dilution from this year’s annual stock grants. We also paid an aggregate of $64 million, or $2.45 per share, to our shareholders through our quarterly and special cash dividends.

In addition, today, the Board approved a quarterly cash dividend of $0.60 per share to be paid on September 8th to shareholders of record as of the close of business on August 25th. While our second quarter and year-to-date results reflect the continued challenging market conditions, we’ve made significant strides over the last few years to increase the long-term earnings power of our platform. Once markets open up, we believe we are in a position of strength to continue to realize the benefits of our expanded and diversified business. With that, we’ll open up the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Devin Ryan with JMP Securities. Your line is open. Please go ahead.

Devin Ryan: Hey, thanks. Good morning, everyone.

Chad Abraham: Hey, Devin.

Deb Schoneman: Good morning.

Devin Ryan: Hey. Just want to start on the equity financing market. Obviously, you saw some improving results there, and I think healthcare showed some strength and that helped offset some of the softness in advisory. So, just wanted to maybe dig in a little bit around, what you’re seeing the equity issuance environment, whether you’re seeing activity kind of building outside of just healthcare? And then, the bigger picture is really you had a better quarter from the first quarter, but you’re kind of just back to the second half of last year levels and then clearly far off of the 2021 record, which also wasn’t normal. But just trying to get a sense of like how you guys think about what a normalization in that business line could look like for Piper, especially since you’ve been adding resources and bankers?

Chad Abraham: Yeah. So, I guess, first of all on the ECM question. Yes, it certainly continues to be better than the last few quarters, but the total overall fee pool in ECM is still down significantly from the averages from the last four or five years, but it’s improving. I would say, for us, it has been concentrated in healthcare, but you’re slowly seeing some IPOs, obviously we were on a restaurant IPO, we did a couple of financial services deals secondaries. So, I would say it’s — we’re usually concentrated more than half in healthcare, that’s still the case. We’re slowly seeing it branch out, expect it to continue to get a little better, but it’s not like it’s fantastic levels of ECM at all. It’s just better than how bad it’s been.

And then, relative to just overall revenue levels and where things are, we’ve definitely in the last couple of months seen a pickup in our deal announcements, certainly our deal announcements with any size, we announced a couple of significant depository transactions this week. And certainly, every few days, we are seeing more announcements, obviously some of that will trickle into Q3 and Q4, and so we made the comment that the advisory’s definitely going to be better in the second half. I would say, though, it’s not like the COVID snap back in 2020, it feels like recovery is slow build, it’s definitely getting better. We’re definitely able to get some of the sponsor deals financed. But it’s slowly better, it’s not racing back.

Devin Ryan: Okay. Terrific. Thanks, Chad. And then just a similar kind of framework for the advisory business. So, appreciate some of the commentary, it sounds like some of the early indicators of business there are improving. So, I’d love to just dig in a little bit around that and if you can provide more perspective around either anecdotally or quantifying what you’re seeing around some of these early indicators. And really, is it a function of just deals that you’ve been mandated on and maybe people are feeling like, let’s kind of start to move these forward at a faster pace or are you seeing kind of an uptick in new activity coming in or sponsors saying, okay, it’s now been quite some time since we’ve done something, markets are more interesting now and so maybe the risk isn’t as extreme.

Like what is the tone? And then, this recovery in your mind, is it uneven where you have maybe the best assets trade and assets that are more cyclical or macro-centric just sit and so it’s not a kind of a normal recovery in a sense of like everything is improving at the same time.