PJT Partners Inc. (NYSE:PJT) Q4 2023 Earnings Call Transcript February 6, 2024
PJT Partners Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the PJT Partners Fourth 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.
Sharon Pearson: Thank you very much, Todd, and good morning, and welcome to the PJT Partners full year and fourth 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 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.
Paul Taubman: Thank you, Sharon, and thank you all for joining us this morning. Today, we reported financial results for quarter end, and full year 2023. Revenues were the highest in our firm's history at $1.15 billion, up 12% year-over-year. For the full year, adjusted pretax income was $183 million, and adjusted EPS was $3.27 per share. In a very challenging operating environment, we delivered differentiated results, as strong absolute performance in restructuring, coupled with strong relative performance in strategic advisory were the drivers of our record revenues. This was also a record year for senior recruiting as we added 19 partners and Managing Directors, principally in strategic advisory. Many of these hires bring key industry expertise and relationships, which will significantly augment the depth and breadth of our industry footprint.
Total strategic advisory partner and MD headcount increased 20% this year, while firm-wide headcount grew 12%. This considerable hiring has weighed on our operating margins, but we are confident that in time, our shareholders will be rewarded for this investment. During the year, we repurchased almost 2.2 million share equivalents. Even with these significant share repurchases, we ended the year with more than $435 million of cash on hand, and the strongest balance sheet in our firm's history. Given the strength of our balance sheet, and our continued emphasis, on mitigating dilution resulting from our continuing investment in the franchise. Our Board has authorized a new $500 million share repurchase program, which supersedes the current repurchase authorization.
After Helen takes you through our financial results, I will review our business performance, recruiting initiatives and outlook in greater detail. Helen?
Helen Meates: Thank you, Paul. Good morning. Beginning with revenues. For the full year 2023, total revenues were $1.153 billion, up 12% year-over-year, with a significant increase in restructuring more than offsetting a significant decline in PJT Park Hill and a modest decline in strategic advisory revenues, compared to year ago levels. For the fourth quarter, total revenues were $329 million, up 17% year-over-year, with a significant increase in restructuring and a modest increase in strategic advisory revenues more than offsetting declines in PJT Park Hill. 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 $805 million, up 23% year-over-year with a compensation ratio of 69.8%. Given we accrued compensation at 69.5% - through the first nine months of the year, the resulting fourth quarter ratio was 70.7%. We will provide guidance on our accrual for compensation expense for 2024, when we report our first quarter results. Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was $165 million for the full year 2023 and $43 million for the fourth quarter. As a percentage of revenues, our adjusted non-comp expense was 14.3% for the full year 2023 and 13.2% for the fourth quarter. Adjusted non-compensation expense grew 12% in 2023 year-over-year, driven primarily by higher professional fees and higher occupancy costs.
Looking ahead, we expect our total non-comp expense in 2024, to grow at a similar rate, compared to 2023. This will primarily be driven, by a step function increase in our occupancy costs, as we recently renegotiated a 15-year lease in our office space in New York. We are taking on some additional space in other regions that, we will grow into, over the next several years. Turning to adjusted pretax income. We reported adjusted pretax income of $183 million for the full year 2023 and $53 million for the fourth quarter. Our adjusted pretax margin was 15.8%, for the full year and 16.1% in the fourth quarter. The provision for taxes, as with prior years - we presented 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.
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Our effective tax rate for the full year, was 25.3% below the 26.7% estimated rate that, we applied for the first nine months of the year, reflecting a final allocation of state level income taxes. In 2024, we would expect our effective tax rate to be around 25%, and we will refine our view, at the end of the first quarter. Earnings per share are adjusted as converted earnings were $3.27 per share for the full year, compared to $3.92 in 2022 and $0.96 in the fourth quarter, compared to $1.08 in 2022. The share count for the year ended 2023, our weighted average share count was 41.7 million shares, essentially unchanged from the prior year. During the year, we repurchased the equivalent of approximately 2.2 million shares primarily through open market repurchases.
For the fourth quarter, our weighted average share count was 42.9 million shares, up 2.7% year-over-year. A portion of this increase, is attributable to the fact that during the fourth quarter, we reached the price hurdle on 1.3 million performance shares, which are partially reflected in our Q4 weighted average share count and will be fully reflected in our Q1 2024 weighted average share count. Of these 1.3 million performance units, 20% have met the service requirements. As Paul mentioned, our Board has authorized a new $500 million share repurchase program. And consistent with our capital priorities, we will continue to invest in the franchise while using excess cash, to reduce the dilutive impact of share issuance. On the balance sheet, we ended the year with $437 million in cash, cash equivalents and short-term investments, and $456 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 dividend will be paid on March 20, 2024, to Class A common shareholders of record as of March 6. And with that, I'll turn back to Paul.
Paul Taubman: Thank you, Helen. Beginning with restructuring. We saw significant growth in restructuring activity in 2023, driven by sharply higher interest rates, dislocated capital markets and slowing economic growth around the globe. Our restructuring business capitalized on this favorable backdrop, delivering stellar results for the fourth quarter, and record results for the full year. We were increasingly active, across both liability management and in-court restructuring assignments, as we continue to be the go-to advisor for complex liability management engagements. For full year 2023, we ranked number one in announced restructurings in both the U.S. and globally, and we renamed Global Restructuring Advisor of the Year by IFR for the fourth year in a row.
Turning to PJT Park Hill. After record fundraising in 2021 and 2022, the 2023 environment, for alternative investments, proved to be extraordinarily difficult. The dearth of M&A and IPO activity, led to a significant reduction in capital return, leaving many alternatives investors over allocated, to the asset class and highly restrained, in making new commitments. Last year's environment was best characterized as one of elongated fundraising time lines, and downward revisions to fund size targets with an uptick in the number of postponed fundraises. Against this difficult backdrop, our fourth quarter and full year revenues in PJT Park Hill declined significantly year-on-year. On the positive side, the gap between public and private valuations has narrowed, and we now see some early signs of a more constructive fundraising environment.
Turning to Strategic Advisory. 2023 marked the second year in a row of meaningfully below trend global M&A activity, with announced global M&A volumes, declining to levels not seen in a decade. The uncertainty caused by volatile markets, sharply higher interest rates, and greater economic and geopolitical uncertainty, all weighed on the pace of strategic activity. Our fourth quarter Strategic Advisory revenues were up slightly and our full year strategic advisory revenues were down slightly year-over-year. These results, compared favorably when measured against the declines, in industry-wide volumes. Turning to talent. Our most important strategic priority continues, to be the build-out of our strategic advisory franchise. 2023 was a favorable recruiting environment when dislocated M&A markets enabled us to significantly accelerate the pace of senior hiring.
While we expect our hiring to remain elevated in 2024, it may not equal 2023's record levels. As we look ahead, in PJT Park Hill, we expect the environment to slowly, but steadily improve after a difficult couple of years for fundraising. Narrowing spreads between public and private valuations, more receptive capital markets, and greater capital returns to LPs, as M&A and IPO activity picks up should result in an improved backdrop for fundraising. Our private capital solutions business, should also benefit from increased demand from GPs, to employ continuation funds, to create additional monetization opportunities for their LPs. In M&A, while we expect the markets to take time, to get back to historical relationships between M&A activity, and broader market benchmarks.
The direction of travel should be positive, although the pace of such recovery remains unclear. Higher equity valuations, lower volatility and anticipated rate cuts, should cause the macro environment to be more conducive to deal making. Executives remain focused on M&A, as a strategic tool, as they seek to remake their companies in response, to the significant disruptions caused by technological innovation. Today, we have a decidedly more formidable team on the field, to capitalize on these opportunities. We are better positioned in certain key growth areas, including technology, healthcare and consumer. Our brand and our capabilities are stronger than ever. We are engaged in an increasing number of strategic conversations and our mandate count, is at near record levels, up 25% from a year ago.
However, given the slowdown in 2023 deal activity, we begin 2024 with a lower than typical backlog of announced pending close transactions. In restructuring, we are in the early days of what we believe will be a multiyear cycle of elevated activity in liability management and in-court restructurings. While the rebound in capital markets activity and lower interest rates, may provide relief for some companies, the sheer quantum of debt that must be refinanced, together with an increasing number of companies facing structural pressures, will likely extend this restructuring cycle for some time to come. We are confident about our businesses, we are confident about our strategy, and we are confident about our long-term growth prospects. And with that, we will now take your questions.
Operator: [Operator Instructions] Our first question will come from Devin Ryan with JMP Securities. Please go ahead.
