Perella Weinberg Partners - Q1 2024

Transcript

Operator (participant)

Good morning and welcome to the Perella Weinberg First Quarter 2024 Earnings Conference Call. During today's discussion, all callers will be placed in a listen-only mode. Following management's prepared remarks, the conference call will be open for questions from the research community. This conference call is being recorded. At this time, I'd like to turn the conference over to Taylor Reinhardt, Head of Communications and Marketing. Please go ahead.

Taylor Reinhardt (Head of Communications and Marketing)

Thank you, operator, and welcome all. Joining me today are Andrew Bednar, Chief Executive Officer, and Alex Gottschalk, Chief Financial Officer. Before we begin, I'd like to note that this call may contain forward-looking statements, including Perella Weinberg's expectations of future financial and business performance and conditions and industry outlook. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those discussed in the forward-looking statements and are not guarantees of future events or performance. Please refer to Perella Weinberg's most recent SEC filings for a discussion of certain of these risks and uncertainties. The forward-looking statements are based on our current beliefs and expectations, and the firm undertakes no obligation to update any forward-looking statements.

During the call, there will also be a discussion of some metrics, which are non-GAAP financial measures, which management believes are relevant in assessing the financial performance of the business. Perella Weinberg has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8K, which can be found on the company's website. I will now turn the call over to Andrew Bednar to discuss our results.

Andrew Bednar (CEO)

Thank you, Taylor, and good morning. Today we reported first quarter revenues of $102 million, results that do not reflect the underlying strength of our business. We are the lead advisor in three of the 15 largest transactions announced year to date, and our announced and pending transaction revenue backlog stands today at a record high for the firm, nearly double the level last year at this time. This quarter, we experienced an unusually large amount of transaction announcements with elongated closing timelines and where closing and revenue recognition are expected to occur in subsequent periods. The market backdrop continues to improve, especially for larger transactions. For many of our clients, as market values increase, even more scale is needed to move the needle and drive growth. This is something we are seeing across industries and geographies, along with increased complexity.

So we see more corporate carve-outs, sponsors in joint bids with strategic buyers, and asset contribution transactions, trends that are broadly aligning very favorably with our stated strategy and our firm's capabilities. We and our industry also are benefiting from a market that values independent advice more than ever, with 14 of the top 20 announced transactions this year having a boutique as the exclusive or as a co-advisor. The higher-for-longer consensus on interest rates combined with impending maturities continues to fuel the need for liability management advice, and demand from both investors and borrowers for capital solutions remains strong. While base rates are higher, spreads have narrowed, and corporate and sponsor clients have plenty of access to capital. It's financing terms and valuations that present hurdles to transactions, not credit availability. Recruiting remains a strategic priority in our mission to scale the firm.

We welcomed the Managing Director of Financial Institutions earlier this year, and in April, we welcomed a new partner with a focus on media and interactive entertainment, including gaming, a very active sector which we believe will be accretive to our business. We are executing on our growth strategy and enhancing our franchise globally with the addition of exceptional talent and world-class clients who choose Perella Weinberg as their trusted advisor. We are focused on serving our clients with the highest caliber advice, strengthening our relationships across corporates, sponsors, and beyond, investing to operate at scale, and in turn, delivering for our shareholders. We are confident that in time, our reported results will reflect the underlying strength and progress of our business. Alex, I'll now turn the call over to you to review our financial results and capital management in more detail.

Alex Gottschalk (CFO)

Thank you, Andrew. For the first quarter, our adjusted compensation expense as a percentage of revenues was 84%. This was the result of a low revenue denominator and is not reflective of a full-year accrual. We expect this ratio to normalize toward our historic target as the year progresses. Our adjusted non-compensation expense was $37 million in the quarter, up 7% from a year ago, and trending within the range we indicated on our last call. We continue to manage these expenses prudently to drive earnings. Shifting to taxes, our adjusted if converted effective tax rate for the first quarter reflects a tax benefit and includes the impact of stock compensation awards vesting at a higher price than granted. Excluding this impact, the adjusted tax rate would have been 32%, and we expect the full-year tax rate to be below 30%.

We ended the quarter with a very strong balance sheet with $157 million in cash and no debt. On March 1st, we successfully completed a $5.75 million share offering, increasing our float and trading liquidity. With the offering proceeds and using some of our cash on hand, we expect to settle certain partnership units for tax purposes in Q2, which will result in at least a $6 million reduction in our share equivalents outstanding. As we've indicated previously, proactively managing our share count is a priority. In the first quarter, we returned $32 million to our equity holders through the net settlement, share equivalents, distributions, and dividends. This morning, we declared a quarterly dividend of $0.07 per share. With that, operator, please open the line for questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. We will pause for a moment to allow questions to queue. We will take our first question from Devin Ryan with Citizens JMP.

Devin Ryan (director of Financial Technology research)

Great. Good morning, Andrew and Alex. How are you?

Andrew Bednar (CEO)

Good morning. Thank you, Devin.

Devin Ryan (director of Financial Technology research)

A couple of kind of interrelated questions here on just the pipeline. Andrew heard the remarks around record announced and pending revenue backlog. I'd love to just get a sense of what you're seeing in trend in the velocity of deals moving from mandate to announcement, so kind of what you're seeing there. And then you talked about the elongation of closings. I know that can sometimes just even be deal-specific. So if you take a step back, are you seeing any maybe acceleration in closing speeds just as the environment's getting better, as you mentioned? Thank you.

Andrew Bednar (CEO)

Yeah, thanks for the question, Devin. I think the environment is much better for large deals getting announced and getting closed. I think the environment for timelines is similar to what it's been for the last several quarters, which is that they're elongated at every stage of the transaction, from beginning of discussion to engagement with a counterparty to announcement and then finally to closing. And there are different reasons along that spectrum for the elongation, and I don't think it's anything idiosyncratic to Perella Weinberg and our clients. I think we're more aligned with larger transactions. We're more aligned with complexity. So we tend to have transactions that do take longer. I don't think there's anything new in that arena to report. But I think the environment's better for these types of transactions getting announced, but they have not improved in terms of timelines.

In fact, some of the timelines probably are even further elongated, Devin.

Devin Ryan (director of Financial Technology research)

Okay. Got it. Thank you. And then just one on the comp ratio. So I appreciate this quarter's more of a placeholder because of the revenue dynamics and the timing, as you just mentioned, and heard Alex's comments about kind of getting back into that kind of more historical range. How should we think about the puts and takes around kind of where comp ratio could settle out? Just trying to think about some of the things that could potentially create upward pressure versus maybe things that could create some downward pressure as we think about kind of more a normalized comp ratio maybe on a full-year basis. Thanks.

Andrew Bednar (CEO)

Yeah, I think, look, this quarter is really just math, right? It's not our best estimate of comp ratio. It's really the math of looking at base comp and payroll and benefits, the amortization of prior awards, and then a modest bonus accrual. So this really is not designed to be a reflection of our comp ratio for the full year. It's reflective of an abnormally low revenue quarter. So I don't think it's extrapolatable to the full year. The pressures we see in the broader compensation arena are similar to what we've seen historically. I think the increases have abated. I think we've absorbed that well. I don't think there are any surprises kind of in the stack. I think we've managed that very, very well. This is really about revenue and driving revenue through the course of the year. It's early in the game.

I think our objective here is to get to target. We're very much on that path. Again, it's early in the year to predict where we'll be. But we've said in the remarks, and I'll reiterate, that our objective is to get back to our targets for the full year. That was the mid-60s target that we've always stand behind.

Devin Ryan (director of Financial Technology research)

Yep. Okay. Great color. I will leave it there, but thanks very much.

Andrew Bednar (CEO)

Thanks, Devin.

Operator (participant)

Thank you. We will take our next question from Steven Chubak with Wolfe Research.

Steven Chubak (Managing Director)

Hi. Good morning. So I wanted to start with a question specific to the energy space. Activity's been quite robust. There's been a number of sizable deals announced or at least rumored to be in the works per some of the press reports. Just given your strong franchise in that area, just want to get a sense as to what you're hearing from corporates in terms of dialogue, whether you expect there's going to be continued robust levels of activity within the sector and how you're positioned for it.

Andrew Bednar (CEO)

Yeah, we've always had a strong franchise in energy. We feel very good about our team and our positioning. We had a couple of unfortunate near misses during the course of fourth quarter. In the first quarter, that happens in the business where we're involved in a transaction, but we don't quite get to the finish line. We've got a couple and announced and pending, which are large, which you can see in Dealogic. The business is also expanding beyond traditional upstream and infrastructure and downstream. We're now in a very significant way in energy transition and in renewables, and that space looks to be consolidating and increasing in overall activity for the things that we advised on. So we feel very good about energy. Obviously, we're watching the developments with the FTC and the ExxonMobil and the impact that that might have in shale and beyond.

But we think that's probably a one-off. But it was interesting for all of us to read about the impending consent decree with Exxon.

Steven Chubak (Managing Director)

Got it. And just a clarifying question on the comp ratio commentary. So it sounds as though 1Q revenue weakness, more anomalous or at least a function of timing, and that we should see some normalization in the comp ratio as revenues ramp. Certainly, the record backlog commentary is supportive of some improvement in revenues. Is that mid-60s? Is that a full-year comp ratio expectation, or is that just the expectation over the course of the year or the remaining three quarters just as revenues do start to normalize a bit?

Andrew Bednar (CEO)

Yeah, it's really hard for us to try to predict the quarter-to-quarter movements. We're very focused on where we sort of end the year and the overall margin. And we're still committed to targeting that mid-60s level that we came out with at the time of our listing. What happens period-over-period? You're going to have ups and downs around that. And so it's just very, very hard given the nature of our business, not only to predict the revenue flows but also what the resulting comp margin is. And I want to be unambiguous about what I mean by announced and pending transaction revenue backlog. That is not our pipeline. Our pipeline is a very different set of opportunities that we see in front of us, which is also very strong.

But announced and pending is all the transactions that have been announced and where we have an engagement letter and where we expect to take revenue at closing. And that's something, again, that's corroborated by the Dealogic data as well. I know sometimes those terms are interchangeable, and some folks interchange them. But I want to be very clear that that announced and pending is what we mean, that there are transactions that are on their way toward closing.

Steven Chubak (Managing Director)

Understood. Thanks so much for taking my questions.

Andrew Bednar (CEO)

Thank you.

Operator (participant)

Thank you. We will take our next question from Aidan Hall with KBW.

Aidan Hall (VP and Equity Research)

Great. Thanks for taking my questions. I wanted to touch on some of the revenue dynamics in the quarter. The 4Q call, it was noted elevated levels of restructuring liability management as well as strategic M&A. Obviously, this quarter wasn't reflective of the M&A activity and the record pipeline levels that are announced but pending levels that you're speaking to. So wondering if you could touch on the mix of revenue this quarter between M&A and the financing and capital solutions business and a reasonable expectation from a mix standpoint for the remainder of the year.

Andrew Bednar (CEO)

Yeah, as you know, we don't disclose the specific mix. We're seeing a pretty similar development of that over the course of the last quarter-plus. I think by the time we get to year-end, it'll be a similar mix that we've had over time. We're going to have a lot more growth coming through the end of the year from the M&A business, just based on my remarks a few seconds ago about the announced and pending. That's largely M&A-related. But our liability management business and what we call financing and capital solutions is a much broader business now and not just core restructuring. So we look at that broad business compared to our traditional M&A business. And the mix probably will weigh a bit more toward M&A but not a material change from what we've seen the last couple of years on the mix.

Aidan Hall (VP and Equity Research)

Got it. I appreciate the color. Maybe just switching gears to the recruiting environment. Andrew, you've previously mentioned that you expect it to remain an active year in 2024. So maybe can you just contextualize for us where you're seeing a lot of that activity, whether by region, sector, strategy, and maybe just for modeling purposes, partner headcount at quarter-end?

Andrew Bednar (CEO)

Yeah, the partner headcount was 62 at quarter-end. We have one MD who joined in the FIG space and one partner who joined in the interactive media space. I think we mentioned that in our comments. The recruiting environment is still a very good environment for, I think, our industry and particularly movements away from large money center institutions. I think that trend is continuing. I do think some of the dialogue is just a bit slower than what I saw we were seeing last year. And I think that's a function of people being a bit busier and also just seasonally.

Typically, first quarter, people wait to see their annual compensation and then make decisions and move toward making changes through the second and third quarter, which then you don't see until fourth quarter-plus because then you have garden leave and non-competes, etc., that delay the arrival of some of that recruiting. So I do think that a busier environment for many of us has led to a bit of an elongation of the recruiting pipeline as well. But it's still active. Dialogue is very high. And the trending is still similar to what we saw last year.

Devin Ryan (director of Financial Technology research)

Great. I'll leave it there. Thanks for taking my questions.

Andrew Bednar (CEO)

Thank you.

Operator (participant)

Thank you. We will take our last question from James Yarrow with Goldman Sachs.

James Yaro (Managing Director and Equity Research)

Good morning, and thanks for taking my questions. So maybe just starting on the revenue side, given the starting point and your comments that this quarter's result is not representative of the strength of your business, given strong backlogs, etc., I think the range of outcomes for your revenue going forward is perhaps wider than normal. With that in mind, is there anything that you might be able to offer to help us think about the revenue build over the course of this year and into 2025?

Andrew Bednar (CEO)

Yeah, I'm not sure it's wider than normal. I think we're just looking at a different timeline. I mean, literally, the first quarter, we're sitting here in a continuous game where we have to just stop in 90 days and tell you what our financial history is. And that's what we've done. But the types of transactions we're involved in and the time to closing, it's very, very difficult to predict exactly which period the revenue will be recorded. We feel very good about the team we have on the field. We feel great about the clients that we're working with. And our revenue just comes in over time, and very hard to predict the period-to-period. So I think our objective is to grow our revenue.

We do that by putting more people on the ground and having the right kinds of coverage of clients and the right kind of product experts on the field. We're adding that talent. We're acquiring new clients. The business is progressing well. It's just this quarter in particular, for those 90 days, we didn't record the revenue that we had hoped for because of transactions that are going to close in a subsequent period. So I'm not sure. I certainly don't agree that the range of outcomes is wider. But in any given period, that may be true. But that's just a function of, again, when things happen to close or get pushed out.

James Yaro (Managing Director and Equity Research)

Understood. Okay. Maybe just on the non-comp dollars, they were in the guidance range for single-digit year-on-year growth. Any updates on the non-comp expectations for the full year?

Andrew Bednar (CEO)

No, I think where we highlighted last year that we were going to be up around 7%, I think, is what we remarked. And Alex, can correct me if I've misstated that. But we saw a bunch of inflation last year. We had some double rent last year. We're starting to put that in the rearview mirror. We're getting much more efficient in certain parts of our tech stack. We have gotten rid of the double rent. We're fully settled into our offices, so that's behind us. We are going to see a ramp-up in T&E, but that's a good sign. That's effectively our investment in our teams and our talent and our clients. And so I think that's a part of non-comp that I look to back out and not really think of as an expense but more as CapEx.

Nothing that I think we're not anticipating any significant moves from where we've indicated based on our last call.

James Yaro (Managing Director and Equity Research)

Okay, very clear. And then just lastly, a quick update on the capital return plans and share count. Given the puts and takes around the recent issuance and the fact that you didn't do any open market repurchases this quarter, anything on the buyback going forward, and then perhaps, are there any other material drivers of your share count that we should be thinking about over the course of the year from additional share unlocks?

Andrew Bednar (CEO)

Yeah, look, we are owner-operators. As I've said in the past, we own as employees and partners some 50% of the firm. And so we're very focused on the impact to share count. We're a buyer of our stock and have many, many ways that we can effectively manage share count. And so when we look to use our capital to manage share count, we really look to the ways that we can get size at a price and with the least cost and the least market friction. And doing so through net settlement. And now with the offering proceeds, we'll have another 6+ million shares that we buy in related to our partnership units. And so if you look back since our listing in June of 2021 and with that upcoming Q2 repurchase, we've repurchased over 25 million shares.

We've returned over $275 million or so in cash through repurchases. That added to a $75 million dividend over that 3-year period. We've returned $350+ million through those mechanisms. So we'll continue to be very prudent. As Alex said in the upfront comments, we put as a priority managing our share count. Other than the net settlements that we traditionally see plus the Q2, which is anomalous where we're going to have a little over 6 million in net settle that we'll buy in, we'll have an exchange through the course of the year that we'll have opportunities to buy back shares. But my sense is we'll be quite a lot ahead of certainly our modeling on where we thought we'd be on the buyback front. So we're managing share count very well. And it's mitigating significantly all of the stock-based compensation that we issue on an annual basis.

Nothing else that I would add to that, James, in terms of modeling. We're just an aggressive buyer of the stock. It just is in different venues that we do that.

James Yaro (Managing Director and Equity Research)

Very helpful. Thank you.

Operator (participant)

Thank you. It appears that we have no further questions at this time. I will now turn the program back over to Andrew Bednar for any additional or closing remarks.

Andrew Bednar (CEO)

Okay, great. Thank you, operator. Thank you, everyone, for joining, all of our stakeholders. We appreciate your support and confidence in Perella Weinberg. We look forward to connecting again next quarter. Thank you.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may disconnect at any time.