Piper Sandler Companies
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good morning, and welcome to the Piper Sandler Companies Conference Call to discuss the Financial Results for the Fourth Quarter and Full Year of 2020. During the question-and-answer session, securities industry professionals may ask questions with management. The Company has asked that I remind you that statements on this call that are not historical or current facts, including statements about beliefs and expectations are forward-looking statements that involve inherent risks and uncertainties. Factors that could cause actual results to differ materially from those that are anticipated are identified in the Company's earnings release and reports on file with the SEC, which are available on the Company's website at www.pipersandler.com and on the SEC website at www.sec.gov.

[Chad Abraham:]

Good morning, everyone. Thank you for joining our fourth quarter and full-year 2020 call. I'm here with Deb Schoneman, our President; and Tim Carter, our CFO. We will go through our prepared remarks and then open up the call for questions. Reflecting on the year, from the global pandemic and its impact on the economy and workers to a watershed movement in racial justice to a polarized election, 2020 has brought more change that many could have imagined. Through all of this, my employee partners remained focused on serving our clients and I could not be more proud of their dedication and resiliency. Our business is heavily influenced by economic conditions and the financial markets. 2020 was a roller coaster with equity markets notching all-time highs in February before plunging 34%, and then rapidly rebounding with broad indices, again setting all-time highs by year-end. Volatility was extreme during March and April and remained elevated for much of the year in both equity and fixed-income markets. Against this backdrop, on a full year basis, we generated over $1 billion in revenues and more than $10 of adjusted EPS, both for the first time in our history. Beyond this record performance, we also moved our business forward through a number of strategic actions during the year. Our record results demonstrate the strength and diversification of our business and our deep client relationships. Despite the challenges, and maybe in part because of them, 2020 was a year of tremendous growth and transformation for us. Highlighting the year, we closed on the combination with Sandler O'Neill and became Piper Sandler Companies. We grew market share in all of our business lines. We underwrote a record number of equity and debt financings. We helped clients navigate extreme volatility and executed record equity volumes. We raised a record level of par value for clients in the municipal negotiated market and completed the second most transactions nationwide. We more than doubled our fixed income business by providing differentiated advice to clients, navigating the changing markets.

[Deb Schoneman:]

Thanks, Chad. Let me begin with an update on our equity brokerage business. Equity markets in the fourth quarter saw elevated volatility and volumes. Market indices traded higher, driven by optimism on COVID-19 vaccine results and an economic recovery.

[Tim Carter:]

Thanks, Deb. As a reminder, my comments will be focused on our adjusted non-GAAP financial results. We generated revenues of $400 million for the fourth quarter of 2020, up 34% sequentially, driven by a significant rebound in advisory services combined with strong contributions from each of our business lines. For the full year 2020, we generated net revenues of $1.2 billion, up 50% over 2019, reflecting the investments we have made through our acquisitions, as well as the market leadership and scale we have achieved in many of our businesses. Turning to operating expenses. Our compensation ratio for the fourth quarter of 2020 was 59.5%, lower compared to prior quarters resulting from our strong performance. On a full-year basis, our comp ratio was 61.9%. We continue to manage compensation levels while considering investments, employee retention and business outlook. Looking ahead to 2021, we expect our compensation ratio to be near 62% based on our current market outlook and strong pipeline of growth opportunities. Non-compensation expenses, excluding reimbursed deal expenses, of $45 million for the fourth quarter of 2020 continue to reflect the pause on travel and entertainment. On a full-year basis, excluding reimbursed deal expenses, non-comp costs were $183 million, up 21% over 2019, due to the addition of our acquisitions, which was offset in part by the decline in travel. We continue to be disciplined in managing our expenses as they are a significant driver of operating leverage. We anticipate that some of the operational changes we have adopted this year, including how we engage with clients in certain areas of our business, are sustainable going forward. Looking to 2021, we expect non-comp expenses to gradually increase from current quarterly levels as we anticipate travel will begin to resume in the second half of the year. We estimate our 2021 non-comp expenses, excluding reimbursed deal expenses, will average approximately $48 million to $50 million per quarter. Now turning to operating margin and income. For the fourth quarter of 2020, we generated record operating income of $109 million, representing a 27.2% operating margin, reflecting the leverage in our model at higher revenue levels. For the full year of 2020, operating income of $250 million increased 81% compared to 2019. Our operating margin for the year was 20.3%, a meaningful expansion from 16.7% in 2019, driven by the increased scale of our platform, the successful integration of our acquisitions, and the benefit of lower travel and entertainment expenses. We continue to demonstrate our ability to drive operating margin expansion as we grow our revenues. Our adjusted tax rate was 29.4% for the fourth quarter of 2020 and 26.2% on a full year basis. We continue to expect our full year adjusted tax rate will be within our targeted range of 26% to 28% going forward. For the fourth quarter of 2020, we generated net income of $75 million and diluted EPS of $4.17, up sequentially and year-over-year, driven by higher revenues and an increased margin. Net income of $178 million for the full year of 2020 increased 67.2% and diluted EPS of $10.02 increased 36% compared to 2019, demonstrating the accretive impact of our acquisitions and strategic use of capital. The scale in operating leverage of our platform and capital-light trading approach allows us to generate significant levels of excess cash from operations. Let me now turn to capital and dividends. Our capital and liquidity is strong and our leverage is low. We believe that our priorities for capital deployment remain aligned with our shareholders' interests. Our primary objectives are

[Operator:]

And our first question comes from the line of Devin Ryan with JMP Securities. Go ahead please. Your line is open.

[Devin Ryan:]

Maybe I'll start here with a crystal ball question for you. I appreciate some of the outlook commentary. And I also understand it was just terrific year for capital raising in both equities and fixed income. So with the high bar - but also appreciating that this year you started on a pretty good note. Can we think that the M&A advisory kind of acceleration can offset that or how would you frame kind of the potential deceleration in capital raising after such a great year versus your M&A reaccelerating? And then just kind of second part of that question and really what I'm getting at here is, you've added a lot of capabilities on the advisory side. I think your pre-Sandler, the advisory kind of normalized revenue levels around $400 million to $450 million, but with Sandler and balance of TRS, is there a way to think about kind of what the potential is in advisory in a more normalized environment assuming we're kind of moving back into something like that?

[Chad Abraham:]

Yes Devin, I think that's a great question, and I guess I would start with advisory. I think you're dead on. Obviously, throughout the year, Q2 and Q3 were really weak for us in advisory, after an okay start in Q1, and a very strong finish. But I would still characterize sort of the total advisory results as suboptimal for sort of the platform we built by combining Sandler, adding Valence, the restructuring capability with TRS. Frankly, many of our team is being down somewhat for advisory. So I think we're very optimistic that we could see some significant growth in the total advisory number as the year growth. And I'm really excited about the platform. The pipeline, many of the good thing is going on there. I do think per your question, some of that will be offset with some very difficult comparables for ECM, the DCM business, and both brokerage businesses and even public finance. All of that being said, the capital markets have started this year very strong in January but I think to see some of those results - I mean you'd have to have a crystal ball looking out this year, to say, hey, is the most of the year is going to be strong, and that's just hard to predict. So I think you're looking at this the right way. We absolutely feel we've got a significant upside on the advisory business this year.

[Devin Ryan:]

And maybe we should just think about the $1 billion plus investment banking overall as maybe the way that put it all together as kind of where you guys are going. Okay. Maybe one here for Deb just on the brokerage business. Clearly, great year there as well, and you guys are gaining market share and benefiting from some of the acquisitions as well. In the fixed income business specifically, is it possible to kind of parse through the strength of 2020? And how much was the elevated volume versus just some of the unusual benefits of maybe market making positioning given kind of big moves in markets? Because I'm assuming some of that may be difficult to repeat. Do you think that's material versus the volumes, that will be off a bit, but you could remain still relatively healthy? So just trying to kind of think about the different components of the fixed income brokerage business.

[Deb Schoneman:]

Yes, I would say if you look at 2020, it was much less around positioning in any way and much more around just the volumes and the business and things that were going well, clients flushed with cash, whether that was because of refinancing or prepays coming through or banks not lending. So a lot of that strength really more driven by just what was happening in the marketplace, which I think as we look out, it's - again the crystal ball is how long those conducive market conditions will stay in place. The other thing I would say, if we think about the combination with Sandler and what we had hoped to see with the two businesses coming together, we're really starting to see synergies. We fully integrated those businesses and seeing the complementary nature path, whether it's the strong municipals that legacy Piper had being sold into banks or a lot of the products strength in corporates and mortgages, as well as derivatives, loan strategies, et cetera being sold into the breadth of the legacy Piper client base. So those synergies are also driving what we've seen as upside.

[Devin Ryan:]

All right. And then maybe just one here for Tim to close out on the capital position. So, obviously, good to see the increase in dividend special. So, in aggregate, $3.10 in dividend over the course of the year, but earnings, I think, ultimately probably ended up much better than anyone could have imagined six, nine months ago. And so I just wanted to get some thoughts around how you guys are feeling about the excess capital position today following some of these actions? Like, how you're kind of coming out of 2020? And then just thinking about uses of capital, obviously, acquisitions have taken up some of the capital in investment growth. But just kind of where you are? Because it would still seem that there's a pretty healthy kind of excess capital standing point at this point.

[Tim Carter:]

Yes. Devin, you're right. We continue to generate excess. Coming into 2020, we had certainly deployed a lot of that through Weeden, Sandler, Valence. So we were taking probably a more measured pace at how we were thinking about it. We stayed at the lower end of our dividend payout ratio this year. But it does put us in a good position to be able to deploy across the different levers that we talked about. I think our bias continues to be to have capital to deploy in growth opportunities and that's sort of at the top of the list. So we want to have the capital there to do that. But certainly with the amount of cash and capital that we're generating, you can see what we did with the quarterly dividend, starting to move that up. Thinking about where we end in the dividend payout range for this year could be a little bit higher and then still thinking about opportunities to buy stock. So in a good position, want to deploy to accretive growth opportunities, it's the number one priority.

[Devin Ryan:]

All right. Okay. Terrific. I will leave it there. Let someone else ask. But I appreciate it, and good to see the really strong end of the year.

[Chad Abraham:]

Thanks, Devin.

[Operator:]

Our next question comes from the line of Michael Brown with KBW. Go ahead please. Your line is open.

[Michael Brown:]

So I wanted to ask about advisory first. So really strong fourth quarter results. And I just wanted to parse out the strength in the results there. So I'd appreciate if you can just share some color about how much was really from kind of pent-up demand from pre-COVID and just those deals kind of coming through in closing? And then how much was really from the deals that came during the recovery in M&A that began in the summer and fall as we think about the - maybe the split this quarter, and then of course, kind of a run rate as we think about in the early part of '21 here?

[Chad Abraham:]

Yes. Mike, I think that's a good question. We very much looked at that. And maybe just first, we frankly had strong advisory contribution across all of our industry teams. Financial services was by far the biggest advisory business in Q4, followed by healthcare. And then, frankly, very good quarter from our industrials and consumer and energy businesses. Relative to how much was sort of pre-pent-up demand, I would say, it's probably a little over half was related to deals that sort of restarted were in the queue finished, but we definitely got some transactions done that - once things started to improve in August and September, we got a bunch of stuff done in December. So I think it was honestly some of both to drive that Q4 results.

[Michael Brown:]

Okay, great. And you noted that the backlog is strong. And so I just was curious if you could characterize that relative to prior periods? And obviously with acquisition that makes it a little bit challenging. But is it better now than it was going into 2020? I think that was generally a period that was - obviously COVID was the real curve ball, but it was a period that was expected to be very strong for the industry. So I'm just curious if current levels are kind of above that period? And we'd also appreciate some comments on the healthcare and finance vertical specifically, and how you think those could play out here in 2020 - 2021? Thanks.

[Chad Abraham:]

Yes. So I think for us it depends on the various industry teams. I would say most of our industry teams have backlogs at least as strong as we entered 2020. And in total for us, obviously, that means our backlog is stronger than that, because we've also added Valence and TRS and some new recruits and teams. When you just parse through particular industry groups, we've got a fantastic backlog in healthcare and feel very good about the M&A here we're going to have in healthcare. We also have some very good discussions in financial services. What I would say about financial services and M&A backlog is there is just a longer period from announced to close. So a lot of that momentum has really picked up in the last couple of months. So how much financial services, M&A we get done? It depends a lot on how much we get announced in the first half. But generally across the board, the backdrop across our industry groups, and even the stuff we've added like with Valence, is quite strong. So as I said, we're pretty optimistic about the results for advisory this year.

[Michael Brown:]

If I could just ask one more on IB here. So the $1 billion target that you laid out there - appreciate that update and it certainly helps to have that guide post out there. Can you just give me a little bit more color there? Is that have a timeframe kind of associated with it? Or is it - obviously, there is - it's market dependent, so it may not take time. But I'm just curious how to think about what that timeframe could be? And what market backdrop does that assume? And do you incorporate any other inorganic actions or bolt-ons when you think about that $1 billion that meant to be target for kind of what the existing Piper Sandler platform looks like today?

[Chad Abraham:]

Yes. What I would say is we've just found sort of in our investment banking organization, we find a lot of value for sort of setting these goals. I mean when I was first running banking, we had sort of set this goal for $500 million. And it took us a few years. When we did the Sandler acquisition, we felt like we had the investment banking platform that in the next two to three years, we could get to $750 million banking platform. But frankly, it just happened a lot quicker than we thought. And I think with just adding Valence, some of the investments we're making in Europe, adding the restructuring capability with TRS, the focus is on productivity. We feel really good about the $1 billion target. And I would say that's probably a few years out. Target is the way we think about that. And could that include some small team lift-outs or tuck-in acquisitions? Yes. But it doesn't assume anything sort of major on the corporate development front. We really feel like with our - what will be throughout this year, $150 million - or 150 managing directors, we've got the banking platform to drive that over the next few years.

[Operator:]

Our next question comes from the line of Mike Grondahl with Northland Securities. Go ahead please. Your line is open.

[Mike Grondahl:]

Yes. Thanks guys, and congratulations on the strong finish and the strong start. Chad, you mentioned a little bit about how you grew market share. And is there any vertical that - or a couple of verticals that really stick out where you think you took more share than average?

[Chad Abraham:]

Yes. I would say, we had a spectacular year in healthcare, primarily driven by our ECM business. We had - we've had a very strong healthcare franchise for 20 plus years, and it's always been led by sort of market-leading M&A. I would say within the ECM business, we've also always had a significant business. But just going back five years, I'd remind you, we made a lot of investments in our biotech franchise building out a much broader research platform, building out very specialized sales efforts in healthcare. We added a bunch of senior bankers. And so we absolutely - and it was a spectacular market for the fee pool. I mean, the fee pool was up significantly last year, but even within that healthcare fee pool, we grow - we grew market share a lot. And I think it's the first time we've been in the top five for book running sort of IPOs and follow-ons in that entire healthcare market. So that's probably the one I would highlight for the most significant industry vertical market share gains.

[Mike Grondahl:]

Any others that stick out over the course of the year in the fourth quarter?

[Chad Abraham:]

Yes. Like I said, we had a strong fourth quarter in a lot of our verticals. We did, frankly, the vast majority of our industrials business in M&A in Q4. So we feel good about where we're headed there. But, obviously, that was after a very slow Q2, Q3. Financial services, as I said was our number one advisory business in Q4. Really good combination of some larger deals closing. And we just did a significant amount of capital advisory business in Q4. And so if I was to point to another really high market share, great business - our financial services team does a majority of the transactions for community banks in debt capital raising. Whether that's underwritten debt, private placement debt, however you want to look at it, we did a lot of volume in Q4, and have very high market share.

[Mike Grondahl:]

Got it. And then your non-comp expenses were basically flat 3Q to 4Q. And obviously, the revenue was up $100 million. So great leverage there. How do we think about those going forward? At this new revenue plateau, would you need to invest in the non-comp area much or how do we think about that as we go to 2021?

[Tim Carter:]

Yes. Mike, I don't - I wouldn't say, there is a lot of investment that has to be done at these levels. I mean, we obviously think that the non-comps are going to gradually increase over this year. We just got obviously a lot of leverage on travel-related expenses, given COVID, and expect that we'll see those start to move. We - net of reimbursed deal, $45 million, we've said sort of this range of $48 million to $50 million on a quarterly basis for 2021. Early on, I think, it's a - certainly at the lower end of the range and as the year goes, we expect assuming vaccines rollout and things start to continue to get better, that we trend up towards the - towards more of the top end of that range. But outside of that, I don't see a lot of other change from a non-comp. So we can drive leverage from that.

[Mike Grondahl:]

Got it. Yes. You sure did in 4Q. Hey, and then, maybe lastly. Chad, what's one or two top priorities for you just headed into 2021?

[Chad Abraham:]

Yes. I think the biggest priority, while we're pleased that we had a good rebound in advisory, we still think there is big opportunity for us. Our average fee size - as markets got difficult sort of all through the summer and in certain industry verticals, it was hard to grow average fees when deals get difficult. We think there is a big opportunity to continue to grow our average deal size in M&A, continue to grow our average fee size continue to drive productivity. And then the big priority is making sure across private equity - we've built a really nice investment banking platform across a lot of industries. We want to get that sort of full leverage from the private equity community. In addition to making sure we capture all the opportunity with Valence in the chemical space, which we added last year, and we're really excited about the early start we have with TRS, as you know, we haven't been a big player in the restructuring market in the past, and that's a big opportunity for us.

[Operator:]

And there are no further questions in queue at this time. I'd like to turn the call back over to Mr. Abraham for some closing remarks.

[Chad Abraham:]

Okay. Thank you, Operator. Let me close by again thanking all my employee partners for their hard work and dedication to our clients. We look forward to maintaining our strong momentum here in 2021. Thank you, everyone, and have a great day.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.