PJT Partners Inc

NYSE:PJT

Earnings Call Transcript 2020-Q4

[Operator]

Good day, and welcome to the PJT Partners' Full-Year and Fourth 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.

[Sharon Pearson, IR]

Thanks very much, Katie. Good morning, and welcome to the PJT Partners' full-year and fourth quarter 2020 earnings conference call. I'm Sharon Pearson, Head of Investor Relations at PJT Partners. 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' 2019 Form 10-K, which is available on our Web site 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 these non-GAAP metrics and the GAAP reconciliations, you should refer to the financial data contained within the press release we issued this morning, also available on our Web site.

And with that, I'll turn the call over to Paul.

[Paul Taubman, Chairman and CEO]

Thank you, Sharon. Good morning everyone, and thank you for joining us today. Once again, we are reporting our financial results against the backdrop of the pandemic, which has caused so much suffering and loss. In discussing our record results, we are mindful that this pandemic continues to roil communities and economies around the world, but in these extraordinary times, our team did in fact deliver extraordinary results.

Before we review our 2020 performance, I wanted to reflect on all we have accomplished in just five years. From the beginning, our intent was to build a premier, strategic advisory business from scratch, fortified by leading restructuring and Park Hill businesses. We had unwavering conviction that these businesses would be even more successful as part of an integrated yet independent firm. And we believe that by building closer alignment and by removing legacy conflicts, each business would become larger and more powerful. And in turn, deliver exceptional results.

We have consistently focused on creating a culture, where all of our businesses work hand in glove together to better serve clients. Our unique culture of close collaboration and teamwork coupled with our differentiated capabilities have enabled us to gain traction with clients faster, scale our business faster, and reach $1 billion in revenues faster than even our most optimistic forecast from five years ago.

Now, turning to our full-year 2020 results, firm-wide revenues grew 47% to $1.52 billion, adjusted pre-tax income more than doubled to $271 million, and adjusted earnings per share also more than doubled to $4.93 per share.

Now, drilling down on our results in greater detail, beginning with restructuring, our restructuring business continues to be a market leader, and in 2020 delivered its highest revenue ever. The pace of activity increased dramatically as a result of far reaching business disruptions caused by the global pandemic. Our restructuring practice was bolstered by strong strategic advisory relationships with corporates, as well financial sponsors. This ever closer collaboration enhanced our restructuring win rates and enabled us to seamlessly redirect resources when needed.

Our fourth quarter restructuring revenues were our second highest ever, surpassed only by our record third quarter performance. Everywhere we turned, we see companies and entire industries severely impacted by the pandemic. The inevitable tapering of government support programs over time will further stress already weakened companies. For many, it will simply be a matter of when not if their balance sheets need to be restructured. While we expect these elements to drive elevated restructuring activity for an extended period of time, we do not anticipate 2021 restructuring activity to match 2020 levels.

Turning to PJT Park Hill, we saw a gradual return to a more normal fundraising environment as market volatility subsided and investors became increasingly comfortable making capital commitments in a virtual world. In this pandemic environment, our roster of best-in-class managers coupled with PJT Park Hill's superior distribution capabilities resulted in revenues rebounding in the second-half of the year. This snapback was led by strength in the private equity and hedge fund verticals. As a result, 2020 revenues were only modestly below 2019 levels. We expect PTJ Park Hill to carry over into 2021 the positive momentum experienced in the second-half of 2020.

Turning to strategic advisory, in strategic advisory, we saw significant growth in 2020 revenues compared to the prior year as we benefited from the completion of the strong pipeline of transactions announced prior to the M&A market shutting down in March. Our franchise benefited from expanding footprint as well as greater breadth and depth of capabilities. This in turn enabled us to provide our clients with superior advice and execution across a broader range of products, industries, and geographies. In the most volatile and complex markets we have seen since the global financial crisis, our highly-experienced capital markets team advised an increasing number of clients on liability management, capital structure optimization, and public and private capital raises. Our commitment to developing a leading capital markets advisory business was rewarded this past year as revenues more than doubled. Looking ahead, we expect this business to grow significantly in 2021 and beyond.

In 2020, we also benefited from the continued integration of PJT Camberview into strategic advisory and our firm more broadly. We are increasingly capitalizing on our expanding capabilities in activist and defense, strategic IR, shareholder advisory, and ESG. Our steady investment in our strategic advisory franchise continued in 2020 with the addition of seven new partners. Post the depths of the market dislocations caused by the pandemic we have experienced a significant increase in client dialogs and strategic mandates, which largely track the rebound in market sentiment.

Our pre-announced pipeline, as measured by the number of new mandates and the revenue potential of these mandates has steadily increased over this timeframe, and now stands at its highest levels ever. While we cannot control the pace and timing at which mandates convert into announced and completed transactions, the increasing number and quality of mandates has, in our experience been an important leading indicator of future strategic advisory performance.

Now, over to Helen, to review our financial results in greater detail.

[Helen Meates, CFO]

Thank you, Paul. Good morning. Beginning with revenues, total revenues for 2020 were $1.52 billion, up 47% year-year-year. The breakdown of revenues, advisory revenues were $872 million, up 53% year-over-year, driven by significant increases in both restructuring and strategic advisory. Placement revenues were $162 million, up 22% year-over-year, driven by an increase in corporate private placement activity, as well as increased fund placement activities for private equity and hedge fund clients.

For the fourth quarter, total revenues were $322 million, up 29% year-over-year. The breakdown of revenues in the quarter, advisory revenues of $261 million, up 39% year-over-year, driven by significant year-over-year growth in restructuring and continued growth in strategic advisory. Placement revenues were $56 million, roughly flat year-over-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 $669 million, 63.5% of revenues and below the 65% ratio we accrued through the first nine months of the year. For the fourth quarter, the adjusted compensation ratio was 60.3%. The strength of our revenues in the fourth quarter and the full-year enabled us to reduce our compensation expense as a percentage of revenues. We'll communicate our accrual for compensation expense for 2021 when we report our first quarter results.

Turning to adjusted non-compensation expense, total adjusted non-compensation expense for 2020 was $113 million, down 10% year-over-year. For the fourth quarter, adjusted non-compensation expense was $28 million, down 16% year-over-year. The year-over-year declines in both periods with significant reduction in Travel and Related expense as a consequence of a global pandemic, excluding Travel and Related and non-compensation expense grew 6% year-over-year. As a percentage of revenues, our non-compensation expense was 10.7% for the full-year 2020, and 8.6% for the fourth quarter.

In 2021, outside of Travel and Related expense, we expect to have increased non-comp expense as we continue to grow, head count and invest in our technology capabilities, given the disruptive impact of the pandemic on travel, it's too early to forecast when, and by how much Travel will resume in 2021.

Turning to adjust to pretax income, we reported adjusted pretax income of $271 million for the full-year 2020, up 105% year-over-year and $100 million for the fourth quarter up 81% year-over-year. Our adjusted pretax margin was 25.7% for the full-year, up from 18.4% in 2019, and 31.2% in the fourth quarter, up from 22.3% in the fourth quarter 2019. The provision for taxes as of prior quarters represented 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.

Our effective tax rate for the full-year was 24.8%, which is slightly lower than our previous estimate. And primarily reflects lower than anticipated state and local taxes. In 2021, absent any legislative changes and excluding the tax benefit of share deliveries, we would expect our effective tax rate to be around 25%. The benefit of shared deliveries in 2020 impacted the tax rate by 0.8%. Earnings per share, our adjusted if-converted earnings were $4.93 for the full-year, compared with $2.41 in 2019, and a $1.81 in the fourth quarter, compared with the $1.2 the prior year.

The share count for the year ending 2020, our weighted average share count was $41.4 million at 1% this fiscal year 2019. For the fourth quarter our weighted average share count increased by $1.7 million shares to $42.5 million at 4% versus the fourth quarter of 2019. The share count reflects the partial period inclusion of $2.5 million performance-based units that met share price thresholds during the quarter. This increase was passionately offset by the aggregate repurchase of 1.2 million shares and share equivalents in the quarter.

For the full-year 2020, we repurchased the equivalent of approximately 2.9 million shares at an average price of $56.94 per share through open market share repurchases, exchanges of partnership units for cash, and to make safe settlements. We're currently in receipt of exchange notices for approximately 680,000 partnership units, as we have done in the past, we will exchange these units for cash.

Consistent with our capital priorities, we will continue to focus on investing in the business, but also use the excess cash to reduce the dilutive impact of these investments while also being mindful of our float. The board has authorized an additional $150 million repurchase program for shares of a company's Class A common stock. This is an addition to the $56 million remaining from our prior share repurchases authorization. On the balance sheet, we ended the quarter with a highest cash balances ever with $437 million in cash and cash equivalents and short-term investments, and $329 million in net working capital and we have no founded data outstanding.

And finally, the board has approved a dividend of $0.05 per share. The dividend will be paid on March 17, 2021 to Class A common shareholders of record as of March 03, 2021.

And with that I will turn it back to Paul.

[Paul Taubman, Chairman and CEO]

Thank you, Helen. In terms of our outlook by any absolute or relative measure, our first five years as a public company have been a resounding success. Over that period, our revenues have grown at a compound annual rate of more than 20%. And our pretax income is now more than six times 2015 levels. In just the last two years, our revenues have increased by more than 80% and our pre-tax income has nearly tripled. Undoubtedly 2021 year-over-year comparisons will be more challenging because of the standout performance.

Notwithstanding the tremendous success we have enjoyed in the first five years of our firm, we are still very much in the early days of building out a market-leading franchise. Even though we have more than doubled our headcount in the last five years, we still have a relatively undersized footprint. Looking ahead, we see significant opportunities to expand the global reach of our franchise, and more fully capitalize on our best-in-class advisory capabilities. As our reach expands so too will awareness of our distinctive capabilities and the power of our brand. As before, we remain extremely confident in our future growth prospects.

With that, we will now take your questions.

[Operator]

Thank you. [Operator Instructions] We'll take our first question from Devin Ryan with JMP Securities.

[Devin Ryan, JMP Securities]

Great, good morning everyone.

[Paul Taubman, Chairman and CEO]

Good morning, Devin. Good morning.

[Helen Meates, CFO]

Morning.

[Devin Ryan, JMP Securities]

Thanks. So, first question here, just want to touch on productivity after a terrific 2020. So, one way we look at it, your revenue per employees, $1.4 million on the end-of-year employee headcount, $1.6 million on the beginning of your headcount. I appreciate this is an output, not an input to the model. But how do you think about the push and pull between the productivity that you had this year, and the fact that all businesses were performing pretty well versus the fact that there's still a number of people that are, call it, newer on the platform and are scaling on their contribution and productivity. Just trying to think about -- and this is -- obviously it was a terrific year [indiscernible]. So just trying to think about whether these are levels that could be achieved again or if this is a really high bar just given that all the businesses were performing well?

[Paul Taubman, Chairman and CEO]

Well, I mean it's a simple question with a complex answer. If you break that down there are different elements to it. If we lock the doors and we could repeat all of the market conditions of 2020 with the same team, having been on the platform for one year more, I would expect us to deliver more revenues, and therefore the productivity would be a bit higher, because every year that goes by we are stronger, more formidable firm. And every year that goes by the senior people who are on our platform they have more traction with clients. So all else equal, that vector moves up into the right.

Second issue is as we add more individuals that then pushes that down because as we add additional professionals to the platform we then end up with, in the early days, no real productivity. And then the third is, is that every year the market conditions are not the same. So if you just were to isolate that one dimension, I believe that all of the individuals who are on this platform get stronger and are able to do more business off of this platform as time goes by.

[Devin Ryan, JMP Securities]

Okay, appreciate that, Paul. I understand it's -- there's a lot of moving parts in there, but it's good perspective. And maybe one for Helen on the compensation and ratio, and the trajectory, good to see some kind of continued comp leverage as the business has grown and revenues are scaling. The last four years you've been within 100 basis points of comp growth relative to revenue growth, so there's been a pretty tight relationship there. Is that a good way to continue to think about it or is that just kind of where the output has ended just based on kind of a bottoms-up. It seems like there's a really strong connection, just to try to think about from a modeling perspective if that's a pretty reasonable way to think about it over the next couple years assuming a reasonable revenue backdrop.

[Paul Taubman, Chairman and CEO]

I mean that may in fact be how it reveals itself top down, but we do look at the compensation from the bottom up. We're always focused on making sure that we are not in any way shortchanging our commitment to investment. We also are mindful that over time we expect to deliver increased margin to our stakeholders, although we do consistently make the point that margin improvement comes from both discipline on non-comps, discipline on comps, as well as growth in revenue. So it's never always a straight line in any direction. Margins don't always go up into the right, revenues don't always go up into the right, costs don't always come down into the bottom.

So it's difficult to be overly prescriptive, but we'd make a couple of points, which is we believe that, over time, our overall profitability in normalized conditions should meet or exceed that of a representative peer group, but that in periods of heavy investment and of high growth, and where traction is being made with clients and platform is being enhanced but the full power of the revenues haven't yet reflected, you'll see elevated expenses on the margin side and a little bit of pressure. So over time this all tends to normalize, and that's something we've been saying for five years. But it doesn't happen perfectly neatly quarter-to-quarter or even year-to-year. And what you see here, as much as anything else, was we sat down with what we thought was the appropriate comp accrual at the beginning of the year. And as we saw more and more information we became increasingly comfortable that the full-year ratio should come down, and that was taken all out in the fourth quarter. So the fourth quarter number is far less meaningful than what the full-year ultimately ended up being because we do think about our comp accruals in the context of full-year performance.

[Devin Ryan, JMP Securities]

Sure, okay, no, that's helpful color. Maybe one more, if I can squeeze in here, Paul, just love to get your thoughts on the SPAC market. Some of your peers have launched their own SPACs and have somewhat coordinated business strategies around the opportunities. So obviously, with the surge in activity over the past year in that market I'm curious how you guys are thinking about it and the types of opportunities you're looking at around the SPAC market more broadly?

[Paul Taubman, Chairman and CEO]

We think that this is here for -- maybe not here to stay forever, but it's certainly here for a while. And it is capitalizing on some arbitrage in the ability to create a public vehicle this way than through a more traditional IPO. And we're clearly seeing a market that is flush with capital. We've been active in the SPAC market in a variety of ways. We've served and we'll continue to serve as a book runner on SPAC offerings, we have represented companies and sold them into SPACs, and been part of the de-SPACing process. We have and will continue to raise significant amounts of capital to provide the so-called tight financing into SPACs.

And we're in conversations with our client base as to whether or not there is merit to them either raising their on SPAC or considering a SPAC as a way of creating a public listed entity, or potentially selling the business or monetizing part of the business through a SPAC. So we're very mindful of the trend. I have some questions as to whether this pace of activity can continue. But I do think that the SPAC model is scratching an itch that desperately needs to be scratched, which is to bring particularly high-growth companies, who are voracious needers of capital, to create a public vehicle in a different way, and being able to provide capital directly from sophisticated investors, who are investing really as a late-stage growth investor, and being able to marry thatwith a public listing is powerful.

[Devin Ryan, JMP Securities]

Yes, okay, terrific. I will leave it there. Appreciate the answers.

[Paul Taubman, Chairman and CEO]

Thank you, Devin.

[Operator]

Thank you. We will take our next question from Richard Ramsden with Goldman Sachs.

[Richard Ramsden, Goldman Sachs]

Hi, guys. Good morning. So can I ask a couple of questions? First, let's start with the restructuring business and with your outlook for that business. So I heard your comments around your expectations that will be weak in 2021. Could you just expand a little bit on the drivers to that? Is that because you're seeing weaker backlogs heading into next year or is that just a reflection of the strength of that business and in the second-half of 2020?

[Paul Taubman, Chairman and CEO]

Well, I think to be fair less strong is a more accurate description, because we're talking about stepping back a bit from record levels. So from our perspective, it's going to be a very strong year I think by context. We expect our restructuring performance this year to be meaningfully enhanced relative to what we saw in 2019, but not likely to meet or exceed 2020 levels. And part of that was -- there was restructuring activity that was initiated in the depths of the economic crisis in March and April and May. And I think by all reasonable observation and market conditions are more healthy today than they were then. So I think it's nothing more than that having said that, and we have been consistent on this Richard, the economic damage that has been done to a whole swath of companies and industries and economies is extraordinary. And the quantum of additional debt that has been taken on by many of these companies is unsustainable now with exceedingly low interest rates and with a buoyant equity markets, these companies have been able to sort of continue and to limp along, but they do have damaged economic models many of them, and we believe that inevitably many of those companies will need to be restructured. So we see a very strong opportunity in restructuring for many years, but the fever pitch of the spring and summer of 2020 may well be repeated, but it's not likely to be repeated in the coming month.

[Richard Ramsden, Goldman Sachs]

Okay. That makes sense. And then on the placement business, I think I'm right in saying that this was a record quarter for you. Is there any seasonality that we should think about in the fourth quarter when we think about the run rate for that business for 2021?

[Paul Taubman, Chairman and CEO]

Well, I think Park Hill business tends to have seasonality where a lot of fundraisings, there is an impetus to get fundraisings closed by year-end and not have them carry into the next calendar year. But increasingly our placement revenues are reflective not just of Park Hill performance, but also the substantial corporate private placement business that we have built out. And as part of capital markets advisory, and as we are increasingly involved in pipe transactions for SPACs, as we're increasingly involved in later stage capital raises for private companies and the like you're going to see more of that pop into the placement line. So I think that is partially seasonality, but also reflective of the fact that as our business grows and as we are increasingly undertaking capital raise assignments for a variety of companies, that line is going to be contributed to by multiple parts of our firm.

[Richard Ramsden, Goldman Sachs]

Okay, great. And then just one last one for me, which is -- can you talk a little bit about your longer term aspirations around capital return? So obviously I see the increase in the authorization for the buyback is increasing the dividends something that you would consider this year, just given the scale and the breadth of the business and what are the milestones that we should look for in terms of you increasing the dividend relative to the buyback?

[Paul Taubman, Chairman and CEO]

I think our bias has been to favor share repurchase, or share equivalent repurchase over dividend. And when we got to an economic crisis earlier this year and companies everywhere were suspending dividends or questioning whether they could continue dividends or the like. Our belief is, the soundest way to return capital is to be able to do and on an entirely discretionary basis. And the way to do that is to keep the dividend low. So that is a bias, that doesn't mean there isn't room for it to grow. It just means that our bias is for that reason and the fact that we continue to believe that there's extraordinary value in our shares trading at these levels that we're likely to lean far more heavily on to buybacks than dividends. I also would point out that as our share price has ticked higher and as market conditions have been met, we have been also very focused on offsetting the dilutive effect of those additional shares.

So that's been the bias. We constantly look at the dividend. But I do think that for the foreseeable future, our bias is going to be to try and lean in more to return through repurchase of shares and units than dividend. But there may well come a point in time where that shifts because there's one other thing that we're also mindful of, which is the float in the stock, and it continues to grow. And we have been very focused, Helen, and I want to make sure that the share repurchases are less than additional shares coming into the market so that over time, we have more liquidity, not less. And as long as we can continue to avail ourselves of repurchases of units, which really are twofer, they return capital, they offset dilution, and they don't affect the float. As long as that's available to us, that's likely to be the preferred course. But we're not dogmatic about any of this. And we're always going to be focused on what's the best package of actions to create shareholder value, and to reward our long-term shareholders.

[Richard Ramsden, Goldman Sachs]

Okay, thank you. That's very helpful.

[Paul Taubman, Chairman and CEO]

Thank you, Richard.

[Operator]

Thank you. We'll go next to Jim Mitchell with Seaport Global Securities.

[Jim Mitchell, Seaport Global Securities]

Hey, good morning, Paul, Helen. Maybe just a question on headcount growth, I mean, that's obviously been significant in the strategic advisory area, I think doubled the last three years, how do you think about the recruiting environment now, revenues environment has dramatically changed? Does that sort of make recruits hesitate to come over because they have a big payday coming? Or how do you think, how do we expect or how are you seeing the recruiting environment right now?

[Paul Taubman, Chairman and CEO]

Like the recruiting environment, the longer you go out, the more attractive it is, the number of conversations that that we have just continues to grow. And the more successful our firm, and the more evident it is to outsiders who may not be as close to our firm as some of the others who have joined as they get more familiar with our firm, we get more mindshare, and it's easier to recruit. And certainly, we see that on campuses everywhere at undergraduate and graduate, we have just overwhelming demand to join our firm. The challenge, as we've said before, Jim is in a pandemic world where you're making senior hires, and you don't have the ability to have that direct personal connection. It does make it more difficult. And we've said for a while, that while we will continue to add headcount, doing it in a virtual world is more difficult. It's not impossible, we'll continue to add exceedingly high quality recruits and we'll attract the highest quality partners to our platform. But I would expect that as long as we're in a virtual world, for that to be slower, but the number of conversations and the interest in our firm, we've only seen that grow over time.

[Jim Mitchell, Seaport Global Securities]

Okay, thanks. And maybe just another follow-up on the buyback, I think the last one you announced was in April of '19 for $100 million, you didn't finish it. In this one, you pumped up 50%. Is that a signal that you have a little more capacity that floats better that you can do more, or -- just trying to think of the pace of obviously cash flow was very high? Does that mean you can sort of increase the pace of buybacks in the open market, or this is we shouldn't read into that?

[Paul Taubman, Chairman and CEO]

I'll make two points and then I'll turn it to Helen. One is we are also spending a lot on cash settlement of units that are presented to us, which are not in these numbers. So, these are over and above what the Board authorizes us to respond to exchanges that are presented to us on quarterly basis. So, a perfect example being this quarter, we are going to repurchase nearly 700,000 units for cash, which is effectively a share repurchase. We are mindful of the float. And as long as there is lot of supply available to us through exchanges that is going to be our preferred means. But to the extent those units that are presented to us reduce over time, then we are going to be more to the open market. So, I think that's really how we are thinking about this. And then, the 150 versus 100 is partially reflective of the fact that our share is trading at higher levels today. So, it's the -- you need more capital to retire a share today than we did two or three years ago. And also, we are obviously a larger company with stronger cash balances. So, we are very comfortable with what is now, I guess, $186 million of total authorization.

[Jim Mitchell, Seaport Global Securities]

Right. Okay, so it's more about flexibility not necessarily an acceleration of timing on using that up [indiscernible] I think I am hearing it?

[Paul Taubman, Chairman and CEO]

Maybe another way to see we're looking to continue to aggressively repurchase share equivalents. And how much is going to be through open market repurchases of shares is in large part going to be a function of what's available to us through exchanges. And it becomes more of a plug and also as a function of whether or not we see that there is an opportunity to repurchase shares at bargain prices. So, it's a little bit of everything.

[Jim Mitchell, Seaport Global Securities]

Right, that's clear. Thank you very much.

[Operator]

Thank you. That will conclude our question-and-answer session. At this time, I would like to turn the call back over to Mr. Taubman for any additional or closing remarks.

[Paul Taubman, Chairman and CEO]

I just wanted to thank everyone for joining us this morning. We know that these are challenging times. And on behalf of all of us we wish you good health and that you stay safe, and that we're able to connect at our quarter and continue to this conversation. So, thank you all very much.

[Operator]

That concludes our call. We appreciate your participation.