Good morning, and welcome to the Perella Weinberg Partners third quarter 2022 earnings conference call. Currently, all callers have been placed in a listen-only mode, and following the management's prepared remarks, the call will be open for your questions. If you would like to ask a question at any time, please press star one on your telephone keypad. If you would like to remove yourself from the queue, please press star two. At any time, if you should need operator assistance, please press star zero. Please be advised that today's call is being recorded. I will now turn the call over to Taylor Reinhardt, Head of Investor Relations. You may begin.
Thank you, operator, and welcome to our third quarter 2022 earnings call. Joining me today are Peter Weinberg, Chief Executive Officer, Andrew Bednar, Co-President, and Gary Barancik, Chief Financial Officer. A replay of this call will be available through the Investors page of the company's website approximately two hours following the conclusion of this live broadcast through November 10, 2022. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, November 3, 2022, and have not been updated subsequent to the initial earnings call. Before we begin, I'd like to note that this call may contain forward-looking statements, including PWP'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 PWP'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 statement. 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. PWP has reconciled these items to the most comparable GAAP measures in the press release filed with today's Form 8-K, which can be found on the company's website. I will now turn the call over to Peter Weinberg to discuss our results.
Good morning, and thank you all for joining us on our third quarter 2022 earnings call. This morning we reported third quarter revenues of $145 million, adjusted pre-tax income of $31 million, and adjusted EPS of $0.26 per share. Particularly given the current environment, we are very pleased with the firm's performance, not only in terms of year-to-date quarterly revenue stability, but also in terms of the significant client activity across our global platform. Today, I would like to discuss the current market conditions, the performance of the firm, and how we are positioned for the future. As it relates to today's macro environment, we are certainly not out of the woods yet. Structural inflation is causing a significant increase in interest rates around the world.
Both prices and new issues in the debt markets have declined significantly, particularly among more leveraged credits. Equity markets have followed suit. New issues have slowed to a trickle. All of these factors, plus macroeconomic and geopolitical sensitivities around the world, have inflicted a blow to confidence among corporate leadership and investors. M&A is a symptom of that being down more than 30% this year. Capital Solutions Advisory is a bright spot in our industry, as it typically is when economies and markets are stressed. More on that in a moment. Within the context of this environment, there are two overarching themes for our firm. The first being that complexity and stress create an enormous need for the type of advice that we provide.
Unlike prior down cycles, and I count eight since I got to Wall Street years ago, we find ourselves extremely busy and are actively engaged with clients across the business. Our gross deal pipeline has been broadly stable year to date and can be characterized as extremely full. Given elevated completion risk and a longer timeline to announcement and close, our announced backlog is experiencing a step down as fee events get pushed out. As it relates to the areas of activity, we're seeing broad and healthy dialogue across our coverage and product areas. We are especially encouraged by conversations in areas of recent investment, which are being driven by partners who are not fully ramped on our platform. Today, more than 1/3 of our partners have been in their current position for less than three years.
The second theme is something that you've heard us say before: We are undaunted in our long-term plan to grow and enhance our revenues and profitability, our brand, our product suite, and our global footprint. We continue to hire and promote partners and managing directors and are investing in talent in a disciplined manner. We do not feel market share constrained either in our client businesses or in recruiting senior people from other firms. Quite the opposite. We continue to see great opportunity in both of these growth engines in spite of the current environment.
In addition to building out our traditional M&A franchise in areas of strategic significance, our Capital Solutions Advisory business, which includes restructuring and liability management, capital markets advisory, and private capital placement, has been an investment area for the firm. In this environment, we are having strategic conversations with nearly all of our clients on capital matters, and we are seeing an increase in pitches and engagement letters in restructuring and liability management, which depending on the timing of a recovery, is likely to show results in 2023. While I don't wanna be in the business of predicting the future, I do wanna convey how we're thinking about and planning for it.
While most would agree that the market will bottom at some point, the timing of a recovery in the financial markets in new issue financing and in M&A activity is unknown, and the precise catalyst is, of course, not clear. We are in a slowing economic environment, and we expect that rate rises will continue at least in the near term, not only at the direction of the Fed, but from central banks around the world. That said, CEOs and the public equity and credit markets, for that matter, will quickly change their sentiment as conditions improve. We anticipate the return of confidence long before economic statistics see meaningful improvement, and we believe that the resulting increase in visibility and predictability will translate into more favorable conditions. We are focused on being ready for that across our businesses whenever it occurs.
With no debt and a strong cash position, we're poised to continue investing in our business and serving our clients in this extreme time of need. Again, on continuing to deliver on our plan put forward when we became a public company, we are focused on returning capital to shareholders and simplifying the firm's capital structure. Since the end of March, we have utilized approximately 60% of our $100 million repurchase authorization and continue to see value in our stock. The successful completion of our warrant exchange eliminated the future potential dilutive impact of the 7.9 million warrants, which were previously outstanding. Lastly, I wanna say a few things about the leadership transition that we announced in late September regarding Andrew Bednar succeeding me as CEO come January first. I have known Andrew for 25 years, having met at Goldman Sachs in the early days.
In addition to Andrew's exceptional skills as an investment banker, he has proven to be an excellent manager and leader as Co-President of the firm for the last 2.5 years. The news of Andrew's ascension has been very well received by our team and clients alike, and justly so. As a shareholder, a founder, a continuing partner, as chairman, I believe the firm has never been better positioned than it is today. On that note, I will turn it over to Gary to discuss our results in more detail.
Thank you, Peter. As Peter's already discussed our revenue performance, I'll begin with a discussion of our expenses. As a reminder, my comments will focus on non-GAAP metrics, which we believe are relevant in assessing the financial performance of our business. Our GAAP measures and a reconciliation of GAAP to adjusted results can be found in our earnings press release, which is on our website. On the expense side, in the third quarter, we accrued adjusted compensation expense at 64% of revenues, consistent with the first two quarters of 2022. As the last quarter of the year plays out, we'll reassess this accrual rate for the full year based on the overall business environment, our investment in new talent, and the compensation levels needed to retain key current talent.
While it's too early to make a call, we could see the possibility of increasing our full year compensation ratio by up to a few percentage points at year-end, depending on market conditions. Our adjusted non-compensation expense was $28 million for the third quarter, down 16% year-over-year and 10% quarter-over-quarter and represented 19% of our revenues. Relative to the prior year quarter, our third quarter non-compensation expense benefited from reduced legal, consulting, and D&O insurance costs, which were incurred last year as a newly public company. In addition, in the third quarter, as in prior quarters this year, D&A charges relating to our New York and London headquarters were unusually low as those offices are near the end of their lease periods.
On the other hand, T&E was up $1.3 million quarter-over-quarter from the prior year quarter, with September T&E reaching $1.4 million versus the 2019 average of $1.6 million per month. We foresee an increase in fourth quarter non-compensation expense over the current quarter and expect that including travel, meals, and entertainment, fourth quarter non-comp spend will be in the range of $35 million-$38 million. This quarter-over-quarter increase is due mainly to increased professional fees related to discretionary year-end payments for certain senior advisors, as well as the onset of certain legal projects, technology expense, higher T&E versus the summer period, and a full quarter of overlapping GAAP rent for our current space and new space in New York and London.
Even with this anticipated sequential quarterly increase in non-comp expense in Q4, our full year 2022 non-compensation expense is coming in well below our prior expectations. Looking ahead, we expect an increase in 2023 non-comp spending over the current year due to an anticipated three-quarters of overlapping GAAP rent in New York, higher D&A as our two headquarter build-outs are completed, some increase in technology-related investments, and some assumed continued increase in T&E. At the same time, we're aggressively looking for opportunities to realize cost savings without impacting the strength and growth of our business.
We reported adjusted operating income of $25 million in the third quarter and an adjusted operating margin of 16.9%. Our adjusted non-operating income of $7 million for the third quarter and $14 million for the first nine months included approximately $6 million and $11 million, respectively, of net gains related to FX revaluation and realizations. As in the prior quarter, the majority of this income resulted from how we must account for currency revaluation of our foreign subsidiaries, which hold dollar-denominated cash or net intercompany receivables. The strengthening dollar created significant unrealized FX gains, the majority of which we believe does not have economic substance to our consolidated business given that we report in dollars. Adjusted net income totaled $26 million for the third quarter.
Our adjusted if converted net income for the third quarter was $23 million and presents our results as if all partnership units had converted to shares of common stock. Adjusted and diluted if converted net income per Class A share was $0.26 for the three months ended September 30, 2022. For the year-to-date period, our adjusted as if converted tax rate was approximately 29%, relatively in line with our expectation at June 30. On capital management, year-to-date, we've returned nearly $87 million through the repurchase of approximately 8.5 million shares in the open market, the net settlement of nearly 1 million shares to satisfy tax obligations in lieu of share issuances, and the payment of $19.1 million in pro rata distributions to limited partners, which allowed PWP to pay its dividends of $9.9 million.
The board has declared a quarterly dividend of $0.07 per share payable on December 9th, 2022 to holders of record as of November 25th, 2022. As of September 30, 2022, we held $282 million of cash equivalents and short-term investments in U.S. Treasury securities. We had no debt and had an undrawn revolving credit facility. With that, let me turn the call back to Peter.
Thank you, Gary. Before we open the line for questions, Andrew, if you could say a few words.
Great. Thank you, Peter. I just wanted to say that I'm excited and honored to serve and lead the firm through our next phase of growth and development. I'm especially looking forward to working closely with our exceptional talent across the firm who embody PWP's values of trust, integrity, and teamwork, and who deliver for our clients every day. I also look forward to engaging more with our shareholders and the analyst community as I transition into my new role. Lastly, I strongly echo Peter's sentiment that the firm has never been better positioned, and we will continue working hard to maintain PWP's position as a top choice for exceptional finance talent, to deliver superior results for our clients, and to create long-term value for our shareholders. Operator, we can now open it up for questions. Thank you very much.
Thank you. At this time, if you would like to ask a question, please press star on your telephone keypad. To withdraw yourself from the queue, pressing star two. Our first question will come from Devin Ryan with JMP Securities. Your line is now open.
Okay, good morning, Peter, Gary, and congratulations, Andrew.
Good morning.
First question, I just wanna kind of go to some of Peter's comments, touching on the focus in growing non-M&A advisory businesses. You mentioned capital advisory. How should we think about how much bigger those businesses could be or you'd maybe like to see them be relative to the overall franchise today? Maybe the best way to think about it is on a headcount basis. Just the outlook for capital advisory. Appreciate you've probably seen some improvement there, as you mentioned. How should we think about the order of magnitude of the type of acceleration you're seeing today, which sounds like it'll be much more of a 2023 revenue story.
Yeah. Good morning, Devin. Just to level set, I mean, this is really a very significant opportunity for the firm. Clients who are considering raising capital through an underwriting benefit from having an advisor who's not also an underwriter. You know, this is really our kind of raison d'être. Current market conditions amplify or accentuate that need because the alignment between underwriter and advisor is stressed during times of stress. You know, there's really, and this is a growth area for us. We're building our business, we're building our team in that area, and it's a very exciting area. Another reason why this is exciting for us is that is the privatization of the credit markets in the sense that it also creates opportunities for independent advisors because no underwriter is necessary.
We can of course act as placement agent in this large and growing segment of the credit market, which has taken on even more importance as the public markets have seized up. You know, we don't disclose, you know, specifics on percentage of revenues, but it's one of our top initiatives right now in the firm.
Okay. Great. Thanks, Peter. One probably for Gary here. $282 million in cash, I believe, end of the quarter. Appreciate the comments, desire to return kind of the excess. How should we think about, you know, how much is excess here? You know, even if it's at a high level, I appreciate you have to pay bonuses, office expansion, recruiting, et cetera. Like, how much is excess? Then just the slower pace repurchases in the third quarter, was that market dynamic, just obviously buyback restrictions, or was that just given how much you've done in the first half? Or how should we think about kind of the maybe slower pace in the third quarter than what that translates to for the outlook as well?
Sure, Devin. So on your first point, you know, look, I think on the excess cash question, you're really kinda right in terms of how we think of it. It's kind of thinking about our base needs for retaining cash, which are obviously working capital needs. You know, we do have, you know, the build-outs that we have, which we're still reserving some cash for the, you know, same build-outs. Importantly, you know, we wanna keep some equity for investment purposes, and that can be some general investment in talent. It can be, you know, broadly if we see opportunities. You know, those are all things that we keep in mind.
I think you know, that is gonna be a moving target of what we see as excess at any one point in time. Accrued comp is obviously another component which you mentioned correctly. I think all we can really say is over the long term, you know, we're again, you know, we're not retaining cash. We're gonna continue our approach here. As it relates to the repurchases, to kinda dovetail into your second question here, that is something that we look at not only by seeing where our liquidity is at any time, but it is a little bit opportunistic in terms of where the market is. That's a part of it.
I don't really wanna give specific pacing guidance on that because we wanna have the flexibility to do what's right for the business at the right time. I will tell you know, just to kinda give another metric that, you know, for the quarter to date so far this year, we spent about another $5 million in the month of October, just to give you some sense.
Yep. Okay, terrific. Just last couple quick clarifications. Peter, you talked about, I think, the pipeline holding steady. I just wanna make sure we understand that. You're referring to mandates. Mandates I'm assuming that the firm is on, but it's just taking longer or it's more complicated just to get to a formal announcement, which is maybe what we see in the public domain. The mandates are holding steady. Just wanna make sure I understand the pipeline comment. To Gary's comment on the comp ratio, is the takeaway in the fourth quarter could be up a few percent, or that in the fourth quarter the full year could move a few percent? Just wanna make sure I heard that correctly. Thanks.
Yeah. Sorry, go ahead.
Devin, I'll answer the first question, and I'll ask Gary to answer the second. You described the difference between pipeline and backlog accurately. Pipeline is really the gross picture of our engagements going forward, mandates and otherwise. But it's maintained a very strong level and is only slightly down from last year. The net backlog is what's lower, and that's for the reasons you cited because of elongation of deal closings and just the difficult financing markets.
My comment on the comp ratio was the full year accrual rate actually being up a-
Okay.
2%-3%.
Yeah. Got it. Okay. All right. Thank you very much. Appreciate it.
Thank you.
Thank you. Our next question will come from James Yaro with Goldman Sachs. Your line is now open.
Good morning, and thanks for taking my questions. I just wanted to start with the rates environment here. You know, maybe you could just talk about whether you think there's some sort of absolute level of rates that permanently changes the cadence of advisory activity, whether you think those higher rates are baked in, and then maybe if you could just differentiate between sponsors and strategics. Specifically, I think the question is, you know, when the financing markets reopen, do you think that the sponsors will do, you know, structurally less M&A and, you know, strategics will comprise a greater percentage of the market?
Yeah. Good morning, James. You know, the way that we look at the financing markets right now in just a very simple sense is you know, number one, you know, capital is less available to affect M&A. You know, equity is more expensive. The below- investment- grade credit markets are all but closed. You know, even sponsor LPs are urging caution. Just availability is one issue. Two, capital is, of course more expensive. Investment grade rates are two times what they were at the beginning of the year. Same goes with below- investment- grade. Of course, equity is expensive to issue because it's cheaper. The third thing is that market volatility is obviously significant due to the macro uncertainty. That's kind of where we are now.
I do not think there's a specific rate level that changes all that. I will say that the sentiment, as I mentioned in my comments, can change quite quickly. We still believe there's an enormous amount of capital out there. There is by definition, but it's paused. Confidence can change quickly and strategic ambitions don't stop. You know, we think, we just think a bit more of a stable market, a bit more confidence will open the M&A market and financing as well. I don't believe that the cost of debt capital is gonna come down significantly, but I do believe that the markets will open.
With respect to your question on sponsors versus strategics, it's very interesting right now because what we're seeing is strategics are looking at assets, particularly the capital-rich strategics. For the first time in a long time, they don't have a lot of competition from the sponsor community, which is a real asset for them. That is a dynamic that we've seen in prior crises where the capital rich have been transacting with the capital poor and the strong, you know, have continued to do transactions.
That's really great context. Thank you for that. Maybe if I could just ask one more on Europe, which is
You know, sort of a two-parter. I guess, you know, with higher rates and a stronger U.S. dollar, is that catalyzing any activity, you know, into Europe? Just broadly, you know, Europe's been the strongest part of the M&A market, I'd say, so far this year. Maybe you could just talk about, you know, whether that can continue into next year, given all of the geopolitical and economic concerns over there.
Yeah. On your first question, the dislocation in the foreign exchange markets has really been significant. It has indeed materially affected values. I mean, over the years, when there have been small changes in currencies, it hasn't really affected M&A that much. I think here it may well with respect to cross-border transactions, and we're certainly having discussions in that regard. I think with respect to Europe, the way we look at Europe is, and versus the U.S., is that there are really a couple different parts of that. Number one is that there's some stresses which Europe and the U.S. share, higher cost of capital availability and confidence, as I've mentioned before. Europe, though, has sort of another set of stresses which is more severe than the U.S. One is inflation is higher.
Energy insecurity is more profound there and more present. The macro economy is weaker. As a result, we're finding our clients to be more inwardly focused. They're focused on, in some cases, solvency. They're focused on their people. You know, their strategic ambitions are not extinguished, but they're delayed. We think Europe will continue to be active over time, but the short-term stresses are significant and more so than the U.S.
Thanks a lot for taking my questions.
Thank you. Once again, if you would like to ask a question, please press star one to join the queue. Our next question will come from Michael Brown with KBW. Your line is now open.
Hi. Great. Thanks for taking my questions. Last quarter, you guys talked about an expectation for the second half revenues to be relatively in line with the first half. Looks like, you know, the third quarter came in better than we in the street were expecting. I just wanted to check if that's still the right expectation for the full year here as we think about the fourth quarter.
Hey, Mike. Yes, it is. Our expectations are broadly the same as they were in the last quarter.
Okay, great. Gary, I apologize. I just wanted to make sure I got the comp ratio message correct. Can you just clarify that one more time? Is it up a couple percentage points in 4Q? What does that imply, what was the message about what that implies for the full year? I guess just a follow-on for that is, any initial thoughts on next year? Like, what's kind of driving that potential increase? Is it just higher inflationary costs that could therefore have a bit of a run rate impact into next year as well?
Just on the mechanical question, what I had said was that we could see the potential of increasing our full year comp ratio by up to a few percentage points. That would mean if we did that, it would be a larger fourth quarter hit to come up with, you know, the average for the year, just on that question. I think on your other question about next year, it's really too early to tell. And frankly, part of why we, you know, we decided to keep our comp ratio for Q3 was we wanted to make sure we had very good visibility on what's necessary for the full year. Obviously next year, you know, is gonna be something that we'll look at very closely based on conditions.
I will say, though, we are not changing our midterm general comp guidance of the mid-sixties, which is what we said before.
Mike, I'll also add to that, you know, keep in mind that 50% of the outstanding shares of our firm are owned by people who work here. We're focused on both shareholders and employees, because they're, in many cases, one and the same.
Okay, great. Thanks for taking my questions.
Thank you.
Thank you. Our next question will come from Steven Chubak with Wolfe Research. Your line is now open.
Good morning. This is Brendan O'Brien filling in for Steven. To start, one sector that continues to see relatively strong activity is energy, which is an area of strength for you guys. With oil prices still hovering near $90, a level which, Peter, you previously said that these companies are generating significant amount of cash, do you expect momentum in that business to continue in the immediate term? Do you expect with recessionary fears kind of weighing on oil prices, maybe they take a more cautious stance here?
Well, with respect to the energy sector, you know, one thing to start with on this question is that the leverage in that sector is dramatically down. You know, the way we look at it, the leverage is kind of 1x cash flow. The restructuring opportunity that we saw years ago, we do not think will be active going forward, but we do feel that the M&A opportunity continues to be significant. The M&A market in energy, it's a big market, and there are lots of different pieces to it across the different sectors of energy from upstream, downstream services, et cetera. There has not been a rebound in activity that has tracked the price increase like there have been in increasing price of oil environments.
The message is not too different than it was last time in the sense that with all this excess cash flow, energy companies continue to decide whether or not they wanna distribute it to shareholders through dividends or share repurchase or to start on the acquisition trail. They continue to think that way. There's lots of conversations about that, and we're in the middle of many of them.
Great. For my follow-up, I wanna drill in a bit on restructuring. While it's clear that the environment has improved, we've heard some mixed messaging on activity levels in the U.S. and Europe. I wanna get a sense as to how you would compare activity in the two regions, and if you could remind us on your relative exposure to both of these areas within that business.
Yeah, I would say overall with respect to restructuring, the opportunity is growing. You know, for companies who entered into this economic environment stressed, the stress is multiplied, not only with respect to interest costs, floating- rate interest costs, but also labor costs and supply chain costs, and others, not to mention revenue softening. I would say overall, the market is showing a very interesting and growing opportunity. On top of all that, you have technological obsolescence, which really touches many different industries and creates stress. I think with respect to Europe, it's a more complex restructuring market, as you know, because of the different jurisdictions.
The stress level is higher in Europe and the restructuring opportunity is significant in Europe. As a result, both in the U.S. and Europe, we're seeing an increase in conversations. We're seeing an increase in pitches, and we're seeing an increase in engagement letters. That's really fueled by our footprint, which is really much broader than it was last time that the macroeconomy was in a position that it is today.
That's great, color . Thanks for taking my questions.
Thank you.
Thank you. This concludes the Q&A portion of today's call. I would now like to turn the call back over to Peter Weinberg for any additional or closing remarks.
Thank you, operator. Thanks everybody for joining today, and we look forward to reconnecting as a group, with our year-end results.
Thank you. This concludes the Perella Weinberg Partners third quarter 2022 earnings call and webcast. You may disconnect your line at any time, and have a wonderful day.