PJT Partners Inc. (NYSE:PJT) Q4 2022 Earnings Call Transcript

PJT Partners Inc. (NYSE:PJT) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Please standby. Good day. And welcome to the PJT Partners Full Year and Fourth Quarter 2022 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.

Sharon Pearson: Good morning. And welcome to the PJT Partners full year and fourth quarter 2022 earnings conference call. I am Sharon Pearson, Head of Investor Relations at PJT Partners and joining me today is Paul Taubman, our Chairman and Chief Executive Officer; and Helen Meates, 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 indicated in these statements. We believe that these factors are described in the Risk Factors section contained in PJT Partners’ 2021 Form 10-K, which is available on our website at pjtpartners.com.

And I want to remind you that the company assumes no duty to update any forward-looking statements. The presentation we make today also contains non-GAAP financial measures, which we believe are meaningful in evaluating the company’s performance. The detailed disclosures on these non-GAAP metrics and their GAAP 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 will turn the call over to Paul.

Paul Taubman: Thank you, Sharon, and thank all of you for joining us. This morning we reported 2022 full year revenues of $1.026 billion, adjusted pre-tax income of $221 million and adjusted EPS of $3.92 per share. We are pleased with how we navigated 2022 challenging market environment, with total revenues up 3% from year ago levels. As PJT Park Hill again delivered record performance, our Restructuring revenues grew meaningfully and our Strategic Advisory business performed well on a relative basis, down significantly less than the declines in global M&A and capital markets activity would suggest. Our 2022 cadence of face-to-face client meetings and engagement return closer to pre-COVID levels, which not only help build new relationships, but strengthen existing ones.

While this significant ramp in spending on travel and events drove our aggregate non-comp expense 19% higher. Our non-comp expenditures, excluding these categories grew low-single digits. Partner headcount was up 8% and total headcount was up 9% for the year, as we continue to attract highly talented professionals to our firm. We remain focused on managing share dilution resulting from these investments in talent, ending the year with a fully diluted share count below year ago levels. All in all, we are pleased with how we navigated 2022’s myriad of challenges. After Helen takes you through our financial results, I will review our business performance and outlook in greater detail. Helen?

Helen Meates: Thank you, Paul. Good morning. Beginning with revenues. For the full year 2022, total revenues were $1.026 billion, up 3% year-over-year, with increases in Restructuring and PJT Park Hill more than offsetting declines in Strategic Advisory revenues. For the fourth quarter, total revenues were $280 million, down 11% year-over-year. Significant revenue growth and Restructuring was more than offset by year-over-year revenue declines in PJT Park Hill and Strategic Advisory. With lower corporate capital raises during the fourth quarter, the principal driver of the decline in placement revenues in the quarter. Total revenues that met the criteria to be pulled forward in the quarter were less than $8 million, compared with approximately $12 million in the same period last year.

Turning to expenses. Consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments, these adjustments are more fully described in our 8-K. First, adjusted compensation expense. Full year adjusted compensation expense was $657 million, up 5% year-over-year with a compensation ratio of 64.1%, up from 63% in 2021. We will communicate our accrual for compensation expense for 2023 when we report our first quarter results. Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was $148 million for the full year 2022 and $38 million for the fourth quarter. As a percentage of revenues, our adjusted non-comp expense was 14.4% for the full year 2022 and 13.7% for the fourth quarter. For 2022, the majority of the year-over-year increase in non-comp expense was due to increased travel and related expense.

Our non-comp expense, excluding travel and related grew 6% in 2022. Looking ahead, we expect our travel and related expense to increase in 2023, reflecting more normalized levels of travel, increased headcount and higher travel costs. With our full year run rate for 2023, more consistent with the fourth quarter run rate in 2022. Away from travel and related expense we expect our non-comp expense to grow in the in aggregate in the mid-to-high single digits year-over-year, driven primarily by higher professional fees and a modest expansion of our office space. Turning to adjusted pre-tax income. We reported adjusted pre-tax income of $221 million for the full year 2022, down 9% and $61 million for the fourth quarter, down 24% year-over-year. Our adjusted pre-tax margin was 21.5% for the full year and 21.9% in the fourth quarter.

The provision for taxes, as with prior years, we have presented our results as the full partnership units have been converted to shares and that our income was taxed at a corporate tax rate. Our effective tax rate for the full year was 26%, up slightly from the 25.8% estimated rate that we applied for the first nine months of the year. In 2023, we would expect our effective tax rate to be in line with 2022 and we will refine our view at the end of the first quarter. Our adjusted converted earnings was $3.92 per share for the full year, compared with $4.44 in 2021 and $1.08 in the fourth quarter, compared with $1.52 in 2021. The share count for the year ended 2022, our weighted average share count was 41.7 million shares, down 2% year-over-year, and during the year, we repurchased the equivalent of approximately 2.2 million shares primarily through open market repurchases.

On the balance sheet, we ended the year with $223 million in cash, cash equivalents and short-term investments and $355 million in net working capital and we have no funded debt outstanding. And finally, the Board has approved a dividend of $0.25 per share. The dividend will be paid on March 22, 2023, to Class A common shareholders of record as of March 8th. I will now turn back to Paul.

Paul Taubman: Thank you, Helen. Beginning with PJT Park Hill. As the year progressed, the fundraising environment for alternative investments became significantly more challenging. Sharply lower public market valuations left many investors overextended on their alternatives allocations, which in turn reduced the quantum of capital available for new commitments. This denominator effect, coupled with the frenetic pace at which capital was called in 2021 made for a difficult fundraising environment. Even with this backdrop, revenues grew modestly year-over-year as PJT Park Hill delivered another record year. Our close relationships with capital allocators and our best-in-class distribution capabilities enabled us to represent the highest quality managers with in demand investment strategies.

Turning to Strategic Advisory. In 2022, a sharp downturn in equity markets, greater economic and geopolitical uncertainty, and slowing global growth all adversely impacted the pace of strategic activity. The 425 basis points in Fed tightening across seven consecutive rate hikes, represented the largest and sharpest annual rate increases in more than 40 years. significantly impacting valuations and rolling financial markets. Announced global M&A volumes were down roughly 25% for the first half of the year and nearly 50% for the second half of the year, as the impact of these rate hikes and continued political and economic uncertainties further weighed on markets. While we were not immune to these market dynamics, we performed well on a relative basis, with full year Strategic Advisory revenues down only modestly, notwithstanding the dramatic decline in industry-wide volumes.

Our shareholder engagement practice continued to evidence strong momentum as these dislocated markets resulted in increased client engagement on shareholder advisory, strategic IR and shareholder activism topics. This strength offset the considerable drop-off in our corporate placement revenues, particularly in the fourth quarter. We continue to invest, adding talent across industries, product capabilities and geographies, including the opening of a Paris office this past year. Strategic Advisory headcount grew 10% and Strategic Advisory partner count grew 18% year-over-year. In Restructuring, in 2022, the headwinds that dampened M&A activity became tailwinds for Restructuring and liability management activity. A combination of sharply higher financing costs, dislocated capital markets and more challenging operating fundamentals pressured an increasing number of highly leveraged companies.

We experienced an uptick in liability management mandates, as companies work to restructure debts and create additional liquidity run rate — runway. Overall, our Restructuring revenues increased in 2022 and we ranked number one in announced U.S. and Global Restructurings. As we look ahead, while 2023 is shaping up to be another choppy year, our firm remains well positioned to navigate these uncertain times. In PJT Park Hill, we expect the environment for alternatives fundraising to remain challenging as investors remain highly selective with many fundraises expected to be smaller in size and take longer to close. PJT Park Hill’s 2023 revenues are forecast to be around 2022’s record results, even though Q1 revenues could well be down $30 million to $40 million, given the expected timing of 2023 closings.

In M&A, the environment while improving is still not particularly favorable for deal making. While the recent snapback in equity valuations and the first green shoots of a reopening in the IPO market, are promising harbingers for M&A activity, the low level of global M&A announcements in recent months may well continue for some significant part of 2023. In contrast, we expect our Restructuring activity levels to remain elevated for the extended period of time. For 2023, we expect significant growth in our Restructuring revenues beginning in the second quarter. Any headwinds we face in Strategic Advisory in 2023 will be more than offset by tailwinds in Restructuring. Looking beyond 2023, we remain highly confident in the intermediate and long-term outlook for our Strategic Advisory business as we benefit from the significant investments we have made, which expand our client reach and increase our market share.

As before, we remain confident in our growth prospects. And with that, we will now take your questions.

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Q&A Session

Operator: We will take our first question from Devin Ryan with JMP Securities. Please go ahead.

Devin Ryan: Good morning, everyone. Thanks for taking the questions.

Paul Taubman: Absolutely. Good morning, Devin.

Devin Ryan: I guess I just want to start on where you left off Paul on the outlook. So piecing it all together, it sounds like there’s still an expectation right now for some level of revenue growth in 2023. Is there any way to maybe parse out a little bit around what you are seeing in Restructuring and the order of magnitude of acceleration? It doesn’t feel like we are back to pandemic era stress yet, but have been building maybe in that direction. So just wanted to get a little more context around what you are seeing there?

Paul Taubman: Sure. Well, the reality is that, we have been living in abnormal times as it relates to distress. So 2020 was aberrationally extreme in the level of distress and we are not seeing anything remotely like 2020 levels. The flip side is 2021 and 2022 were equally aberrational the other way, given risk on appetite, near zero interest rates and abilities for even the most highly leveraged companies to secure financing and to manage their debt stack. And I think where we are headed is to a more normal, normal and I think there are two things that I look at, which frame that. The first is default rates the last two years were in the 1%, 1.5% rate, which is meaningfully below what the long-term default rate average is. Even if you strip out the extreme peaks of global financial crisis and COVID and the likes.

So simply getting back to a more normal environment creates significant momentum in the Restructuring business. The second is that the quantum of debt outstanding and the liabilities potentially to be managed in some way, shape or form are meaningfully greater today than they were five years ago. And then here’s the most important point, while companies have done a very good job in moving out their maturities, the reality is that we are sitting here today with less runway for most companies that they have had in more than a decade. And by that, I mean, if you just look at how much debt is likely to mature in the next few years, so that number is at levels that we haven’t seen since 2009, 2010. So I think there’s an opportunity for just in a more normal operating environment for there to be significantly more Restructuring and liability management activity.

And then, finally, just given how much debt was issued with relatively light covenants, the opportunity to be creative in managing liabilities for companies. I think there are more degrees of freedom now than there were historically. So, as a result, we see a lot of runway for a long period of time without having to be doom and gloom.

Devin Ryan: Okay. Terrific. Thanks, Paul. And just a follow-up on Strategic Advisory, I just love to maybe discuss the visibility that you feel like you have heading into this year just in terms of that outlook. It feels like it’s harder to have conviction in the outlook maybe more than normal just in the current environment. And so just trying to kind of think about the framing here, I appreciate announcements have been relatively light over the last few months and so that’s going to feed into the first quarter or two of this year. But at the same time, it sounds like maybe conditions have improved a bit in recent months, but it’s way too early to say it’s sustainable, especially with all the macro uncertainty. So I’d love to just maybe kind of think through the Strategic Advisory comments and maybe what could make things turn out better this year and maybe where it could get south as well?

Paul Taubman: Yeah. This is probably a year where there is less visibility on how things will shake out and historically has been the case. And I think part of that is, as the marketplace heals, you need certain conditions to present themselves and we are certainly getting there. I view what has transpired in the first five weeks of the year as necessary but not sufficient for a return to a higher level of deal making. And therefore, the good news is we are seeing those conditions fall into place and we are starting to check them off and that gives us a reasonable degree of confidence that it’s just simply a matter of not if, but when during the year that you start to see that. But when you try and figure out when do you get lift off, is it a week from now, a month from now, three months from now, and then just given the extended periods of time for transactions to ultimately close and how much of that hits in 2023, it’s just a cloudy crystal ball as it relates to Strategic Advisory this year.

But if I step back just a little bit, I can see much more clearly just given the client engagement that we have, the revenue opportunities, the opportunity to bring the entire firm together. We are a far more advanced organization today than we were two years or three years ago, and at the right time, that will all work through. Where I do have clarity is because those headwinds, which may lean on Strategic Advisory in the near-term, serve to elevate Restructuring in the near-term. If I think about it as a pair trade, I am quite confident that we will be net beneficiaries of this uncertainty, and then as I get a little bit further out, I have greater clarity in where we can take the business next.