PIPR - NYSE

Good morning. And welcome to the Piper Sandler Companies’ Third Quarter 2024 Earnings Conference Call. Today’s call is being recorded and will include remarks by Piper Sandler management followed by a question-and-answer session. I’ll begin by turning the call over to Kate Winslow. Please go ahead.

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

Thank you, Kate. Good morning, everyone. It’s great to be with you to talk about our third quarter 2024 results. We delivered strong year-over-year growth generating adjusted net revenues of $352 million, an 18.4% operating margin and adjusted EPS of $2.57. October has started strong in many of our businesses and we expect fourth quarter revenues to be similar to the strong fourth quarter of last year. Turning to corporate investment banking, revenues of $206 million during the third quarter increased 7% over the same period last year. For the first nine months of 2024, corporate investment banking revenues of $650 million were up 24% from last year. As we have highlighted during past earnings calls, the investments we have made to increase and diversify our product capabilities and industry reach continues to be reflected in our results. M&A and restructuring activity generated 68% of total corporate investment banking revenues, equity financing contributed 18% and debt advisory and financing generated 14% of revenues. From a sector perspective, we had strong and balanced performance across our industry teams with six of our seven verticals experiencing significant growth over the prior year period. In terms of client coverage, our focus on providing more comprehensive solutions to our private equity clients continues to drive performance. Activity from financial sponsors contributed to over half of the year-over-year growth in corporate investment banking revenues. Specific to advisory services, revenues were $188 million during the third quarter of 2024, up 22% year-over-year driven by more completed transactions. We completed 71 advisory transactions during the quarter. Performance was led by healthcare as our market-leading med tech team closed several significant transactions. In addition, our financial services, services and industrials, energy and power, and consumer verticals all produced strong quarters. The diversification of the platform has been evident in 2024 with a different sector leading performance each quarter. Our agent and debt advisory revenues, which are reported within advisory services, continue to be a bright spot as the team is on pace for another strong year. We have an outstanding debt advisory team that assists clients on an agented basis without using any underwriting capital. The growth in private credit combined with the trend of financial sponsors outsourcing their debt raising capabilities has resulted in increased activity. Through the first nine months of 2024, the team has raised over $4.2 billion of proceeds for our clients. Our success in designing, structuring and executing creative solutions tailored to client needs while leveraging deep sector expertise has led to more clients using our debt advisory services, as well as significant repeat business from financial sponsor clients. Through nine months, we generated $529 million in advisory revenues, up 25% from a year ago, and outperformed U.S. transaction volume, which was up approximately 10% from the prior year. Looking forward, a strong October has contributed to a good start to the fourth quarter. If market conditions remain accommodative and closings stay on track, we expect a strong finish to the year in advisory. Turning to corporate financing, revenues were $18 million during the third quarter, down significantly both sequentially and year-over-year. We completed 17 equity and debt financings, raising $10 billion for corporate clients. Performance was led by our financial services team, which completed capital raises in the depository space, as well as real estate and insurance. Corporate financing activity in October has outpaced the entire third quarter and we expect revenues for the fourth quarter to be up meaningfully on a sequential basis. Turning to investment banking managing director headcount, we ended the third quarter with 184 managing directors, the most MDs in our firm history. In August, we closed the acquisition of Aviditi Advisors, which added 11 managing directors to form our private capital advisory group. Throughout 2024, we have continued to build out sector coverage with MD ads in fintech, residential and commercial services, and financial sponsors. We remain focused on continuing to expand our capabilities, increasing productivity and positioning our platform for long-term growth. In closing, our third quarter results were solid. The operating environment has become more constructive and we continue to deliver on our strategy. With that, I will turn the call over to Deb to discuss our public finance and brokerage businesses.

Thanks, Chad. I’ll begin with an update on our public finance business, where market conditions have markedly improved with increased issuance and strong investor demand. During the third quarter, we generated $36 million of municipal financing revenues, up 78% from the prior year quarter and our best quarter since 2021. We underwrote 157 municipal negotiated transactions, raising over $5 billion of par value for our clients. Revenues this quarter were driven by strong performance from both our specialty groups and governmental business. Our special districts group has capitalized on the demand for higher yielding issuances and helped raise $1.6 billion in par value through the first nine months of 2024. This group specializes in creating unique financing structures in partnership with local governments and real estate developers to fund the public infrastructure needs of growing communities. We’ve been growing our special district capabilities and entering new geographies over the last two years and are seeing the results from those investments. Within our governmental business, we continue to build out our national footprint. We recently added two senior bankers to lead our Missouri school business, and in Texas, we have built our franchise into the number one underwriter of school financings in the state. Looking ahead, we expect a strong quarter to finish the year. Turning to our equity brokerage business, we generated revenues of $52 million, up 4% from the third quarter of last year. We traded 2.7 billion shares during the quarter on behalf of over 1,200 unique clients. The quality of our research product and trade execution is winning market share and helping offset the impact from a declining market wallet. The fourth quarter tends to be our strongest of the year and we expect this year to follow that trend. Lastly, turning to fixed income, we generated revenues of $48 million for the third quarter of 2024, up 22% sequentially and 20% from the year-ago period. Market conditions improved during the quarter, driving increased client activity. With the Fed cutting interest rates’ 50 basis points and more confidence on the direction of interest rates, clients were eager to invest some of their liquidity, as well as adjust their hedging positions. Additionally, many of our depository clients have worked with our analytics team to take advantage of the change in the yield curve and execute significant balance sheet restructuring trades. Our fixed income strategy is to lead with analytics and advice, which allows us to maintain a capital-light approach even with significantly higher revenues. With continued improvement in the fixed income market, we anticipate a strong finish to the year with fourth quarter results similar to the third quarter. Now, I will turn the call over to Kate to review our financial results and provide an update on capital use.

Thanks, Deb. As a reminder, my comments will address our adjusted non-GAAP financial results, which should be considered in addition to and not a substitute for the corresponding GAAP financial measures. We generated net revenues of $352 million for the third quarter of 2024, in line with the sequential quarter as the improvement in municipal financing, fixed income services and advisory offset the decline in corporate financing activity. Net revenues for the quarter increased 15% compared to the third quarter of last year, driven by higher revenues across most of our businesses. For the first nine months of 2024, net revenues totaled $1 billion, up 19% over last year. More accommodative markets, as well as market share gains, drove increased revenues across corporate investment banking, municipal financing, and fixed income services. The year-over-year growth in net revenue continues to highlight the benefits from our sector, product and client diversification within our businesses. Turning to operating expenses and margins, our compensation ratio was 62.5% for the third quarter of 2024 and 62.8% for the nine-month period, down 90 basis points from the first nine months of 2023, due to increased net revenues. We continue to exercise strong operating discipline while balancing employee retention, investment opportunities and near-term margins. Based on our current outlook, we continue to expect our full year compensation ratio to be near this level. Non-compensation expenses for the third quarter of 2024, excluding reimbursed deal costs were $61 million and in line with our guidance. Non-compensation costs during the quarter, excluding deal expenses, decreased 6% on a sequential basis, and increased 7% compared to the year-ago quarter. On a year-to-date basis, excluding reimbursed deal costs, non-compensation expenses were $187 million, or an average of $62 million per quarter and increased 2% over the nine-month period of 2023. Our continued focus on managing the actionable expenses is driving operating leverage, with our non-compensation ratio down 3.6 percentage points compared to last year. During the third quarter of 2024, we generated operating income of $65 million and an operating margin of 18.4%, up over both of the comparable quarters. For the first nine months of this year, operating income totaled $182 million, which resulted in a 17.5% operating margin. Year-to-date, net revenues increased 19%, while our operating profits are up 60% compared to the prior year period. Our income tax rate was 28.6% for the third quarter of 2024 and 22.4% for the first nine months of this year. Income tax expense for the year-to-date period was reduced by $13 million of tax benefits related to the vesting of restricted stock awards. During the third quarter of 2024, we generated net income of $46 million and diluted EPS of $2.57. For the first nine months of this year, net income totaled $141 million and diluted EPS was $7.88. Let me finish with an update on capital allocation. Today, the Board approved a quarterly cash dividend of $0.65 per share. The dividend will be paid on December 13th to shareholders of record as of the close of business on November 22nd. During the third quarter of 2024, we returned an aggregate of $13 million to shareholders, primarily through dividends paid. For the year-to-date period, we returned an aggregate of $121 million to shareholders through dividends paid and share repurchases. We paid an aggregate of $61 million or $2.85 per share to our shareholders through our quarterly and special cash dividends. We also repurchased approximately 325,000 shares of our common stock or $60 million, related to employee tax withholdings on the vesting of restricted stock awards. These repurchases more than offset the share account dilution from this year’s annual stock grant. We continue to execute on our strategy, deliver strong revenues, margins, and returns to our shareholders through cycles while growing our capabilities. Our results for the third quarter and first nine months of 2024 continue to demonstrate the benefit of our diversified platform, as well as strong performance relative to our peer set and we are well positioned to finish the year strong. With that, we can open up the call for questions.

Thank you. [Operator Instructions] And our first question comes from James Yaro with Goldman Sachs.

Good morning and thanks for taking my question. So, I think you did see a little bit of a slowdown sequentially in the corporate finance line. I think so far in 4Q, we’ve seen some stronger industry IPO trends, and I think, Chad, you talked a little bit about some of the stronger 4Q trends for your business in corporate financing. Is that outlook for 4Q in reference to ECM and DCM, and then how do you think about the ECM trajectory next year?

Yeah. I think for us, obviously, Q3 was just real slow for corporate financing. Obviously, part of that was the market, but some of it was just idiosyncratic to us. But we had a few of our larger equity deals that slipped into October. We started October very, very strong on ECM, and yeah, we also expect Q4 to be stronger for DCM. I think most of our commentary on the real strong corporate financing is based on what we’re seeing for ECM, but we also expect DCM to be better.

Okay. That’s helpful. Chad, maybe just one on the equities business, which I think continues to develop -- to deliver healthy results. Maybe you could just help us think about the ability to continue to grow this business and take share from here into the next couple of years?

Yeah. I’d say a couple of things, James. First of all, as we look to continue to build out and we’ll be able to talk more about this in the future as well, but build out the sale of our U.S. research product into the U.K., the EU, and actually rest of the world. So that’s something that we’re spending some time. We’ve hired some talent to build out. So I think that’s where it’s a share gain outside of the U.S. The other thing we’re looking at is just our electronics platform. Again, hired some strong talent there, and it’ll take some time, but looking to continue to build that out, both just with additional client relationships, but also with the product itself. So I’d say those are the two areas where we see outside of always just blocking and tackling with the accounts here in the U.S., but those are two areas for growth for us as we look out over the next year or two.

Okay. Thanks so much for taking my questions.

Thank you.

Thank you. Our next question comes from Brendan O'Brien with Wolfe Research.

Good morning and thanks for taking my questions. I guess to start, I just wanted to touch on capital allocation and how you’re thinking about it at the moment, specifically whether you’re more inclined to do an acquisition versus returning capital to shareholders than you would be historically. Just given where you and your peers are trading today, it feels like there could be some interesting opportunities out there to leverage your multiple to do some accretive acquisitions. So, yeah, it would just be great to get your updated thoughts and how you’re thinking as a volunteer, if at all.

Yeah. I would say in the stack of returning capital, trying to add new teams and acquisitions is always at the top, Brendan, and a lot of that just has to do with over the last six years to seven years, we’ve gotten really good returns from the acquisitions we’ve done. Obviously we closed Aviditi this quarter. But I would say just in general, the acquisition activity has been a little slower because it’s just hard to normalize in terms of what, some of the folks we’re talking to, what the results are, historically through the slow period going forward. Some of that’s normalizing now, and yeah, I would say we’re quite active. And then, again, given that we’ve just had the string of success on the deals, that helps us with other people sort of calling and interesting -- interest -- being interested in partnering. So, yeah, we feel pretty good about the pipeline there.

That’s great. And then for my follow-up, I just want to touch on sponsor activity. While trends have clearly improved relative to where we were in the first half of this year, that area of the market is still clearly running well below normal. So I just want to get a sense as to whether the recent Fed rate cut has had any impact on the willingness of sponsors to transact and whether we can begin to see sponsors, when we could begin to see sponsors return to the market more aggressively.

Yeah. And I would say relative to sponsors, it’s sort of the same theme I’ve had the last three or four quarters. It’s definitely improving, but slowly. At the end of some of our heavy private equity processes, where we usually have a handful of buyers, we’re negotiating with one or two, the price isn’t quite right, the financing isn’t quite perfect, and so I would say it’s every quarter it gets better, but again, it’s not a snapback. So all that being said, I would say, the last few weeks, we’ve seen a lot of new pitching with private equity and so I definitely think we’ll see continued improvement in 2025 from our private equity business, whether that pace of improvement accelerates, not sure. But right now, we’re just sort of assuming that the gradual improvement continues.

Great. Thank you for taking my questions.

Thank you. Our next question comes from Devin Ryan with Citizens JMP.

All right. Yeah. Thanks. Good morning, Chad, Deb and Kate. How are you?

Good. Hi, Devin.

Hi.

First question, just on Aviditi, I know you guys are pretty optimistic about the potential from that transaction. And so with that deal closing recently, I’d love to just maybe get a little bit of a sense of how the integration has been going thus far and the outlook for that business. And really also, how much opportunity do you see to invest behind the business from here, whether that’s on the fundraising side or the secondaries advisory side? Just good to get an update on how that’s going so far.

Yeah. So we closed at the end of August, and obviously, we’ve done a lot of transactions, and some of them have been product-based like this. I would say I feel like relative to other transactions sort of the uptake of sort of inbound calls and a couple of sort of early joint pitches, the pace of sort of interest from our core banking team in this product has been very, very good. So, we’re excited about that. I think relative to investing, like you talked about, obviously, they had a secondary team, but we’re going to put a lot more investment behind that. We’re going to need more talent. That’s probably where there’s even more interest from the bankers. So, we’re hoping to accelerate that. Obviously, that will take us some time, but we are hoping we have all the right people next year and we can dramatically improve that business for them.

All right. Great. Thanks. And then just want to come back to your comments on the broader M&A backdrop and sponsors and just engagement that you’re seeing right now. I’m just curious, are there certain sectors that are, maybe recovering faster and then are there areas where maybe you see catalysts on the horizon? Clearly, the election is one that’s coming soon here, financials would seem to potentially benefit more in the Republican administration. But I’m just curious kind of what you’re seeing behind the scenes in terms of, is it broad-based, kind of slow recovery or are there certain areas that are maybe perking up faster and then potential catalysts to change that as we look into 2025?

Yeah. I mean, for us, we talked about it. I think six of our seven industry teams are up nicely over the nine months. The one that’s not in advisory is healthcare. I would say, relative to some of the transactions, some of the regulatory environment, some things, particularly with certain of our healthcare segments, it’s been a bit of a tougher healthcare environment. But frankly, everything else has been pretty strong. Obviously, kind of every year has recently been a new record in energy. But really, across the Board, we feel pretty good about how broad advisory is. I think, relative to financials. Yeah, we’re definitely feeling better about depositories, and obviously, what happens in the election, like you said, is going to matter. But I think just having that behind us, regardless of what happens, will be a bit more of a catalyst. So, there’s a slow build in depositories, because it takes a while to get the deals announced and then it takes a long time to get them closed. But we will definitely start to see more transactions there.

Yeah. Okay. That’s great. Thanks, Chad. And then, I guess, probably one here for Kate on the comp ratio. Obviously, saw a little bit of improvement there in the third quarter. So, just given the expectation for a better fourth quarter, should we expect a similar level in the fourth quarter for the comp ratio? And then, just maybe remind us how we should be thinking about the relationship of revenue growth and the comp ratios we look into 2025 as well? Thanks.

Sure. Thank you for the question. So, we did see leverage as we continue to demonstrate discipline on the compensation side. We expect the fourth quarter, if the environment is accommodative and the revenues are strong to see a little bit of incremental leverage. As a reminder, as we think about things normalizing, we typically guide to 61.5% to 62.5% as being a more normalized range. Of course, that’s absent any significant investments and so I think that holds true as we think about going into next year. And I think it’s twofold, it’s both the environment and the revenue side of things and, again, the investment side of things. So, I think that range is still reasonable as we think about 2025, but certainly maintaining discipline and driving leverage where we can.

All right, great. Thanks so much. I’ll leave it there. Thanks, everyone.

Thanks.

Thanks, Devin.

[Operator Instructions] Our next question comes from Mike Grondahl with Northland Securities.

Hey. Thanks, guys, and good morning.

Hi.

Deb, just -- what are you feeling about a fixed income outlook kind of for Q and over 2025?

Yeah. So, Q4, as we stated, feel like it’s going to look really similar to Q3. Part of that is we’ve seen some real strength in our depository clients, both just being more active day-to-day, but also, importantly, some of these restructuring trades that they’re doing as they look to shed some non-performing assets, take some losses, but really put that money to work in higher performing. We saw that activity in the end of Q3 and going into Q4 pick up as the Fed reduced rates and I think there’s a certain amount of let’s make sure we don’t miss out on this opportunity. But now as rates have gone back up a little bit, there’s just more measured approach to that. So, still a great environment for it. But with the election and all, that’s why we talk about Q3, Q4 looking very similar to Q3. And as we go into 2025, one of the things that’s overall important for the fixed income business is just an upward sloping yield curve. So, as we see that continue to become more normalized, that’ll be good for our fixed income business next year.

Got it. And Chad, you had said in your prepared remarks, 4Q 2024 was going to look similar to 4Q 2023. I don’t know, any other insight you want to provide on that?

Yeah. I think just to remind people, just on a relative basis, we had a very strong 4Q of last year and we always knew it was going to be a difficult comp. I think we’ve just felt really good about the start in ECM and the start in advisory, and frankly, the start in all of the business lines in October, that gives us confidence that we can match that Q4 2023. Obviously, that -- if there’s dramatic change in market conditions and the close rate on some of these advisory deals that, then that won’t happen. But as we sit here today and with the start in October, we feel pretty good about having a result similar to last year.

Great to hear. Hey. Thank you.

Thanks, Mike.

And it appears there are no further questions at this time. Mr. Abraham, I will turn the conference back to you for any additional or closing remarks.

Thank you, Operator, and everyone that joined. We look forward to updating you on our fourth quarter results next year. Have a great day.