Good day, and welcome to the PJT Partners Third Quarter 2023 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sharon Pearson, Head of Investor Relations. Please go ahead, ma'am..

Thank you very much, Todd. Good morning, and welcome to the PJT Partners third quarter 2023 earnings conference call. I'm Sharon Pearson, Head of Investor Relations at PJT Partners. And joining me today is Paul Taubman, our Chairman and Chief Executive Officer; and Helen 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' 2022 Form 10-K, which is available on our website at pjtpartners.com.

I want to remind you that the company assumes no duty to update any forward-looking statements and that the presentation we make today contains non-GAAP financial measures, which we believe are meaningful in evaluating the company's performance.

For detailed disclosures on 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'll turn the call over to Paul..

Thank you, Sharon. And thank you all for joining us this morning. Before we turn our attention to our financial results, please allow me to make a few comments. This month, the world has witnessed barbaric unspeakable acts perpetrated by a terrorist organization against civilians in Israel.

We express our outrage against such acts, and we had our voice calling for the immediate release of those held hostage. We see the extraordinary suffering of innocent civilians in Israel and Gaza, and we are heartbroken. In an effort to do our part PJT is committing funds to aid humanitarian relief efforts in Israel and Gaza.

Now turning to our results, we continue to operate in a difficult environment as higher rates, tighter monetary conditions, increased economic uncertainty, and a fought geopolitical landscape all the way on markets globally.

These pressures continue to dampen capital formation and global M&A activity, with equity issuance levels, and current M&A volumes down to levels comparable to a decade or so ago. In contrast, this year, the number of U.S. bankruptcy filings is tracking to levels not previously reached in more than a decade.

Against this backdrop, our unique combination of businesses and collaborative team approach delivered superior outcomes for clients and outperformance for our firm. Our nine-month revenues grew 11% year-over-year, with a record of 825 million in revenues.

After Helen takes you through our financial results, I will review our performance by business, provide more detail on our recruiting efforts and update our full year outlook.

Helen?.

Thank you, Paul. Good morning. Beginning with revenues, total revenues for the third quarter were $278 million, up 5% year-over-year. A significant increase in restructuring revenues more than offset continued weakness and PJT Park Hill and lower revenues in strategic advisory compared to a year ago level.

Total revenues that met the criteria to be pulled forward in the third quarter were approximately $5 million compared with approximately $3 million in the same period last year. For the nine months ended September 30, total revenues were $825 million as Paul mentioned, a record first nine months and an increase of 11% year-over-year.

A significant increase in restructuring revenues more than offset a significant decline and PJT Park Hill and a modest decline in strategic advisory compared to a year ago levels. Turning to expenses, consistent with prior quarters, we've presented the expenses with certain non-GAAP adjustments, which are more fully described in our 8-K.

First adjusted compensation expense. We have continued to accrue adjusted compensation expense at 69.5% of revenues for the first nine months of the year. This ratio represents our current expectation for the full year 2023.

Turning to adjusted non-compensation expense, total adjusted non-compensation expense was $41 million for the third quarter, up $4 million year-over-year, and $122 million for the nine months up $13 million year-over-year. As a percentage of revenues, adjusted non-compensation expense was 14.8% for both the third quarter and nine months periods.

Adjusted non-compensation expense grew 12% in the first nine months of the year compared to the same period last year. And we expect the full year growth rate to be in line with that nine-month growth rate, with full year increases driven by higher professional fees, higher occupancy costs, as well as increased travel and entertainment expense.

We reported adjusted pretax income of $44 million for the first quarter and $130 million for the first nine months. Our adjusted pretax margin was 15.7% for both the third quarter and then that's periods, this compares to 20.3% and 21.4% for the three and nine-month periods last year.

The provisions of taxes, as with the prior quarters, we presented our results as if all partnership units had been converted to shares and all of our income was taxed at a corporate tax rates. Our effective tax rates for the first nine months of 2023 was 26.7% and we expect this to be our effective tax rate for the full year.

The earnings per share are adjusted as converted earnings were $0.78 for the third quarter, and $2.30 per share for the first nine months.

On the share count, for the quarter our weighted average share count was 41.4 million shares, including the exchange of partnership units for cash, our repurchases in the first nine months totaled approximately 2 million shares slightly higher than a year ago levels.

On the balance sheet, we ended the quarter with $355 million in cash cash equivalents and short term investments, and $370 million in net working capital, and we have no funded debt outstanding. Finally, the board has approved a dividend of $0.25 per share.

The dividends will be paid on December 20, 2023 to Class A common shareholders of record as of December 6. I'll turn back to Paul. .

Thank you, Helen. Beginning with restructuring. We're experiencing a wave of opportunity not seen in more than a decade, as many companies grapple with an increasing array of challenges, pressured business models, over-leveraged balance sheets, unfavorable credit markets and higher financings.

We continue to believe that this balance sheet repair cycle will persist for an extended period of time, as the pressure on business models becomes more broad based and more companies are impacted by higher interest rates and more restrictive credit conditions.

Consistent with this commentary, our world-class restructuring business continued its strong momentum and leadership position, with revenues for the three-month and nine-month periods up substantially compared to a year ago levels.

Turning to PJT Park Hill, the fundraising environment for alternative investments remains extremely challenging, with the hangover from record 2021 fundraising continuing to constrain investor appetite for new commitments. Subdued IPO and M&A activity has further weighed on new fundraising activity due to the anemic pace of capital return.

As a result, many new fundraisers are being scaled down and taken considerably longer to complete. Against this backdrop, our three and nine months' revenues in PJT Park Hill were down significantly year-on-year. Turning to strategic advisory.

Notwithstanding the recent state of M&A activity, 2023 is shaping up to be the lowest level of deal making in nearly a decade. And when measured as a percentage of global GDP and global market capitalization, M&A activity is at unprecedented low levels. Our strategic advisory business is not immune to the slowdown with revenues.

And for both the three and nine months periods. However, our business continues to perform well on a relative basis with revenue declines meaningfully less than declines in overall M&A activity.

While it is always perilous to call the bottom of any market, we have the utmost confidence that market conditions will improve, and that global M&A volumes will in time, return to levels more in line with historical relationships to global GDP, and global market capitalization.

Our focus remains on ensuring that we are well positioned for the inevitable market recovery. To that end, we remain actively engaged with clients on a broad array of strategic topics. Our pipeline of mandates has steadily grown throughout the year, and it's meaningfully stronger today than it was at the beginning of the year.

Turning to talent, we continue to expand our capabilities through the addition of high quality talent. We previously communicated that this would be our most consequential hiring year ever, as the subdued M&A marketplace presents us with a unique opportunity to accelerate the pace of senior hiring.

Year-to-date, we have hired 17 partners and MDs, strengthening our market position across many industry verticals, including consumer healthcare, industrials, infrastructure, and technology. We expect these elevated recruiting levels to continue into 2024.

We remain steadfast in our focus on long-term shareholder value, and view this recruiting momentum as an important driver of value creation. While we expect substantial returns from these recruiting efforts over the intermediate to long-term, these investments will pressure margins in the near term.

As we look ahead, we expect our full year revenues to be the highest in our firm's history, notwithstanding extraordinarily volatile markets and significant macro headwinds. We remain confident that the businesses we continue to build and integrate position us to weather this challenging environment and to thrive as market conditions improve.

Our valid set of businesses enables us to provide clients with differentiated advice and reward shareholders with differentiated performance. And with that, we will now take your questions..

Thank you. In essence time the floor is now open for your questions. [Operator Instructions] Our first question will come from Devin Ryan with JMP Securities. Please go ahead..

Great morning, everyone.

How are you guys?.

We are well, Devin. Thank you..

I want to start on the restructuring business strength. Clearly, you're seeing a nice contribution year-to-date. And I think your restructuring results are kind of hitting earlier than some of your peers where we're tracking growing mandates, but then you have to see much uplift there so far.

So just want to get a sense of whether you feel like that's mix. I understand you have a leading business here, but just kind of why it's coming in earlier. And then, Paul, it does sound like you're still pretty bullish on the potential for this business and could remain structurally higher.

So I'm just trying to think about whether that could actually mean growth for PJT from what are good levels or if we're just kind of in a higher baseline right now, and that just continues. Thanks. .

Well, there's no doubt we're in a higher for longer restructuring cycle. And we've talked about this for some period of time. I think there are many businesses that were substantially weakened as a result of COVID.

There was an environment where companies that were over leveraged had extraordinarily benign access to capital, seemingly low interest rates. None of those sort of life rafts, are available today.

And as we look at the dialogues that we're having, the mandates that we're winning, we have conviction that this balance sheet repair cycle is going to have legs.

Now like any cycle, it has ebbs and flows, so every day is not just simply a pickup in activity, but we do believe taking a step back that, that these elevated levels should continue for some period of time as access to capital becomes more difficult, as companies need to deal with near term maturities.

And as what we believe will be an economic slowdown continues to affect business models and business performance. So that's kind of where we see the world. .

Okay, great color, Thanks, Paul. And just a follow up here, I guess on just expense ratio. So, revenues are up 11%, year-to-date, comp expenses up about 20% year-to-date.

I know, it's not quite the scientific, but I don't know if it's possible just to break down on comp specifically, just how much of that growth is a function of just amortization from prior year versus, all the recruiting and, the most consequential year of hiring that's going to be this year, versus just how much is just inflation and competitive dynamics, trying to think about that relationship? Thanks..

Sure. I think there's a number of -- there are a number of components to the current ratio debt, and, as you mentioned. But we're sort of begin with what our outlook is for revenues. And one significant factor is the senior level hiring that we're doing that we've talked about, so that will obviously impact it.

We also think about comp discipline around the existing population, the competitive backdrop. And then, as you mentioned, there is amortization from prior year's comfort that we'll be flowing through, as well. So all those factors are taken into account, when we determine what our best estimate for the ratio is..

I think Devin, if you just look back over the last three years, we have a demonstrably stronger firm today than what we presented three years ago. We have meaningfully grown the headcount for operating in market environments for two of our three businesses that are extraordinarily subdued, relative to three years ago.

So when you step back, and you look at the significant investment, the strengthening of the franchise, and the very significant reduction in available wallet, in two of our three businesses, it's not a surprise that the comp ratio has moved higher. .

Yeah, understood. Okay, I will leave it there. Thanks very much. .

Thank you, Devin. Thanks..

Thank you. Our next question will come from James Yaro with Goldman Sachs. Please go ahead..

Good morning. And thank you for taking my questions. Paul, maybe we could just start with the macro backdrop and how is this impacting your business? We obviously have more geopolitical uncertainty as you've alluded to higher rates and obviously upcoming U.S. election.

So maybe you could just talk about what that means for the M&A inflection and perhaps the cadence or timeline for which -- over which we see return to normalized levels of M&A..

Look, we came into this year James, with perhaps the most sober assessment of the M&A marketplace. And we assumed that this would be another down year in the market, I think, notwithstanding that, it was probably damper, it was lower levels, it was more difficult to affect transactions and even wait on the more bearish side had expected to see.

And when you deconstruct it, it's many factors all moving to the negative direction is volatility and difficulty in agreeing on price. It's constrained financing in terms of the quantum of committed financing available.

It's cost of financing, which makes it harder for buyers and sellers to agree It's a very strong antitrust policy and enforcement from the administration, which whether they prevail or not, has a chilling effect on a number of deals because companies are not willing to subject themselves to that uncertainty.

It's this continued drumbeat of whether or not we're going to head into a recession. It's difficulty controlling costs on every dimension, it has been more difficult to get transactions done. But what has been different in this cycle is company's desire to move forward with their strategic agendas remains essentially undeterred.

And that's sort of the, betwixt in between where as difficult as it is to get transactions done. Companies' desires to manage their portfolio to gain core competencies to benefit from scale economies and the like that, that has remained unchallenged.

And then if you add to that, the difficult fundraising environment and alternatives, and a little bit of indigestion from all of the capital that was put out in 2021, sponsors have been meaningfully less active in the marketplace. I think the number of portfolio companies that would like to the IPOed is building so you have an awfully large backlog.

And it's unclear how many of those companies will ultimately get liquidity events in the relative near term. And I think that also in the ecosystem has an effect on how aggressive private equity firms are in putting capital out.

And if there's less confidence that there's a private equity bid for businesses, companies are perhaps more reluctant to initiate a sales process. So all of this feeds on itself. But as I said, inevitably, markets adjust. And I think we're in the adjustment phase on many of these factors. And I think we're a lot closer to getting out of the tunnel.

But it's been -- but it's been a long, dark tunnel..

Okay. That's really helpful perspective, Paul. And just as a follow up, just on the hiring, you've obviously had tremendous success so far with that this year.

Maybe you could just speak to whether you see the same opportunities for hiring today versus the, let's say, the beginning of this year, and what you what your expectations are for hiring into 2024?.

I think we've talked consistently about two impediments to attracting all of the talent in the previous two years. One was the anomalies of COVID, just being in a remote environment, not being able to create those personal connections, that was a unique period of time. And that significantly constrained hiring, and we're well past that, thankfully.

And the second is that in 2021, that headwind was linked to the extraordinary melt up in M&A activity. And therefore the friction costs for senior practitioners to leave firms and take long periods of time on gardening leave, those friction costs were extraordinarily high. And those two together had a chilling effect on our ability to recruit.

And what we now have is probably the best environment we've seen in a long time, because the fundamental attractiveness of our firm continues to build. I think the level of dissatisfaction at many of the big banks continues to remain.

People who have come to our firm have thrived and appreciate the unique culture, and the way in which we can all come together to serve clients, that's better understood by those who are considering joining our firm. We're able to create those personal connections because we're all back in the office.

And the friction costs in the current environment are as low as they've been, arguably forever, because of the low levels of M&A activity. So we don't have quotas every addition to the firm is individual-by-individual, it's all from the bottom up. It's not from the top down. But without those macro impediments.

The attractiveness of our firm as a destination for talent is better shining through. And I certainly expect that momentum to continue in the fourth quarter into 2024. And at some point, we'll get back to a more normal cadence..

That makes sense. Thanks a lot. .

Thank you..

Thank you. Our next question comes from Steven Chubak with Wolfe Research. Please go ahead..

Good morning. This is Brian O'Brien filling in for Steven. I guess to start, results were a bit stronger than maybe your commentary last quarter suggested. And based on the prepared remarks, it seems like that might have largely been on the restructuring side of the business.

So I just wanted to get a sense as to whether this was simply a function of timing, meaning that deals that you expected to close in 4Q closed a bit earlier, or whether there's some meaningful pickup and underlying activity that you weren't expecting.

And if there was more timing related, should we be expecting to see that seasonal uplift in 4Q that you typically have?.

Well, I think we -- I think our full year commentary is modestly more upbeat than it was a quarter ago. So that suggests not timing, per se, but just some additional strikes.

And in the firm, it's always hard to predict exactly how all of these mandates and all of these opportunities translate into revenues, But I would simply say that, as we've been in the, in the field, competing for business and doing the business, and just seeing the macro environment and the opportunities presented to ourselves.

I think our outlook for this year, is marginally improved relative to a quarter ago, I don't believe it's a step function improved, but it is marginally improved. A lot of that is restructuring, but it's not exclusively restructuring..

Got it. That's helpful color.

And I guess for my follow up, I know you touched on this a bit, but we have seen a number of large strategic transactions announced over the past few months, which along with the positive news on the antitrust front, such as the approval of Activision, Microsoft suggests that the environment is relatively more favorable for large strategic transactions.

But at the same time, some of the commentary from the large public audit suggests that activity at sponsors is likely to remain subdued in the near intermediate term.

Could you compare the dialogue that you're having with sponsors and strategics at the moment? And do you feel like the gap is higher and long end rates [ph] is as maybe or could serve as further to seller and I guess for sponsor activity?.

I'm sorry, just just repeat that last -- that last sentence I didn't hear..

The gap higher and long end rates and the potential impact on sponsor activity?.

Look, I think it is -- clearly it's a mixed bag. I can sit here and I could take a picture and talk about green shoots. And at all the reasons to be optimistic, I could also talk about the reasons why that may not come to fruition. I think the reality is, we're dealing with a very challenging environment to get transactions done.

Let's just take antitrust, I think while there have been some well publicized victories, the fact remains that this administration is still committed to active enforcement.

And as a result, it puts businesses at risk because of an extended periods of time between signing and closing and in a volatile macroeconomic backdrop, putting companies and targets in the crosshairs for a longer period of time, when they're not integrated and they're not yet acquired, and they're just sort of sitting out there that has risk.

And that makes it more difficult for companies to get comfortable.

So the mere fact that there is uncertainty, the mere fact that there is longer periods of time, between signing and closing, the fact that there are more regulatory jurisdictions around the globe, with many different agendas, and opportunities for intermediators were to get caught up in a broader geopolitical test of wills, that just weigh in on transactions.

That doesn't mean that it precludes all transactions, it just means at the margin, some transactions that would otherwise be presented to the market as a great deal never see the light of day. I think there's no doubt that private equity firms are looking to create more monetization events with portfolio companies.

As the IPO markets hopefully, open up a bit and one of the challenges will be just the sheer number of companies that would like to access the IPO market, that's why you're seeing greater interest and execution with fund continuation vehicles and the like as you look for ways to create more liquidity for companies.

Committed financing continues to be challenging for very large transactions, but you're then seeing the growth in pools of private capital and direct lenders and more creative deal making. So we're adjusting to this environment.

But what gives me the most confidence is the simple fact that no matter how difficult it is to get deals done, companies' desires to try and figure out a way to present deals and to move forward and the fact that we have an ever growing backlog of strategic initiatives that have not yet been able to be acted upon I think, is an accelerant.

And as soon as some of these conditions, and some of these clouds start to lift, you could see a very strong movement activity to the upside.

So we're controlling what we control, which is making sure we have the right team on the field, making sure we have the right culture to get our team aligned with clients, making sure we have the right priorities, and trying to secure as many high quality mandates as possible.

So even if we don't have as much as we'd like to present to our investors, on a quarterly basis, we're at least positioning ourselves for the inevitable turn. And when it does, hopefully, that will be reflected in in stronger results..

Thanks for taking my question. .

Thank you..

Thank you. Our next question will come from Brennan Hawken with UBS. Please go ahead. And Brennan, your line is live. Please unmute, if you're muted..

Okay, sorry about that. Thanks for taking my questions. I wanted to start, Paul, with your expectation for the recruiting to continue to pressure margins.

When you say that is that incremental pressure versus what you have been generating more recently or is that more saying that the pressure that you've seen recently will continue just trying to understand the implication there?.

Well, I think it's -- I think I wouldn't be telling you anything, you weren't already aware of it saying that the current margins are lower than what they've been historically.

And we would like to get back to where the margins were historically, but as long as we're dealing with a subdued environment, and elevated recruiting, our ability to get back to those margins will be pressured..

Okay, okay. Understood that was just trying to get a little texture on whether or not you're talking about incremental. I guess, I'm left to assume it will be a little incremental. So ---.

Just to be clear, we need to get through this year and see where -- we where we land for the full year. But my hope would be that from there, we would begin to get those margins higher over time and get them back to where they had been historically, that's the objective. So there's no confusion..

Okay, thanks for that, Paul. And then clear strength in restructuring. It really good to see it's really kind of interesting, because we've heard other firms' remark on growth sort of starting to level out. So sounds like you're not seeing that.

Curious, number one, is that still sponsor owned debter-side driven? And given the fact that you're expecting the highest revenue in the firm's history, how does the restructuring revenue year-to-date compared to 2020? And, what kind of order of magnitude do you think we could see, as far as record revenue go? Any additional color there would be great, thank you..

Well, sure, I'll just take the last thing. I mean, all I'm comfortable saying at this point, we still have a lot of the fourth quarter to come. And I really don't want to get overly precise on what our fourth quarter estimates are, because it's very difficult to sort of predict a quarter. We're much more comfortable and thinking about yours.

And I think at this point in the year, I am comfortable saying that this will be, our highest revenue year ever, and the prior peak was 2020. But beyond that, I don't have any additional color to give on that.

And I think that just reflects if you tie it back to earlier comments we had made, it's a slight or a modest improvement in our full year prognosis. And I think a lot of that is restructuring, it's not exclusively restructuring.

I think our restructuring business I would characterize that the early wave was probably more liability management, and proactive managing of [Indiscernible], which was unrelated to bankruptcy filings. We're now starting to see as this difficult credit environment and business pressure continues to carry on that it affects more corporates.

And those companies are increasingly working to proactively manage their debt stacks. And some of them may have no choice but to make use of the courts to resolve some of their over leverage situations. So I think it's, it's a mix of business, it's a mix of business between that as a creditors, it's a mix of business, geographically.

We continue to work to increase our presence outside the United States and Europe and in Asia. We continue to work in court out of court, and I'm quite pleased with just the breadth and depth of our business. And the more that we can link that to our strategic advisory team and their relationships and their industry expertise and their access.

The hope is that we can continue to push forward with this business now. Where does it go quarter-to-quarter? I'm not able to predict that.

But if you ask me, is this going to end all resemble 2021, where we had this burst of activity, and then it dried up? I think this feels very different than that, that this is, this is a balance sheet repair cycle where it's wave after wave that still need to be dealt with. And we don't see using money coming back any anytime soon..

That's very clear and helpful texture. Just I don't know, if it's possible to compare the restructuring strength order of magnitude to 2020, which I believe was your prior record.

Are you exceeding that and to what degree?.

Well, I left produce full year results. And then we can compare, year-on-year when we actually have 2023 done and dusted. We can perhaps look back and see what's better what's different than the prior peak, but give us the benefit of getting through the year..

Okay, thanks for taking my questions..

Thank you. All right..

Thank you. .

I was just going to thank everyone for joining us today. And we appreciate your interest. We appreciate your support. And we look forward to communicating our full year results early in 2024. Thank you very much..

And this does concludes today's call. You may now disconnect..