Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Piper Sandler Cos (PIPR, Financial) reported strong year-over-year growth with adjusted net revenues of $357 million, a 17.3% operating margin, and adjusted EPS of $2.52.
- Corporate investment banking revenues increased by 41% year-over-year, driven by M&A and restructuring activities.
- The company announced the pending acquisition of Aviditi Advisors, which will enhance their private capital advisory capabilities.
- Public finance business saw improved market conditions, generating $25 million in municipal financing revenues, up 22% sequentially.
- Equity brokerage business generated $52 million in revenues, up 3% from the same quarter last year, with a broad client base and strong internal cross-client activity.
Negative Points
- Corporate financing revenues were $51 million, down modestly from the first quarter, with a slowdown expected in the third quarter.
- Fixed income revenues were $40 million, down slightly from the first quarter, with client activity remaining muted due to uncertainty on interest rates.
- Non-compensation expenses were higher than expected due to elevated legal expenses and increased recruiting and placement fees.
- The equity capital markets saw a slowdown in July, impacting the overall performance of the ECM segment.
- Visibility into the fourth quarter remains uncertain, with potential impacts from market volatility and the upcoming election.
Q & A Highlights
Q: Chad, maybe if you could just touch on how your bank clients are thinking about the environment for conducting M&A after a number of years of nearly no activity. Are you seeing early signs of more bank M&A discussions? And what do you think we need for more normalization at this point?
A: I would actually say the last month or two does feel a bit more constructive. It really doesn't have much to do with the regulatory environment. I think it's as simple as a lot of small-cap banks, the stocks are up 20%, 30%. That feels better. And obviously, we've been through a tough period of time and CEO has got to look out and figure out how to drive value and earnings and consolidation is a big part of that. So I think it's certainly early to make that call, but we've definitely seen a pickup in those conversations. And obviously, those deals take time, and it's not going to impact this year. But yes, we feel a lot better about how that's going now.
Q: Maybe just keeping on the bank theme. One for you, Deb. I think we are coming obviously closer to the point of rate cuts after Powell's comments recently. Could you speak to what you are hearing from banks in terms of their appetite as we move ahead in terms of willingness or desire to immunize balance sheets ahead of lower rates?
A: I would say there's more discussion that feels better. I think there's been so many head fakes relative to rate cuts that banks are still a little bit just waiting for almost even a more clear signal before they step in and become more active. So as part of the reason for in my comments, we said we feel like there's some tailwinds. I mean that's part of that. It's just a little bit a matter of timing.
Q: First question, I guess, really a two-part on advisory near term and maybe longer term. Just on the near term, I'd love to get a little bit more color around what you think is driving maybe the positive shift around the edges with sponsor clients and whether you're seeing it across all industries or if it's concentrated. And then kind of taking a step back on the longer term, let's just get maybe an update on Piper's advisory coverage footprint today? And where do you feel like you're lined up against the potential fee pools. Meaning, where is there maybe still opportunity where you're undersized relative to the fee opportunity?
A: I would say with sponsors, I mean, I feel a little like a broken record because we've said this the last couple of quarters, it's been slow, steady improvement, and we've definitely seen an uptick this summer in terms of pitch activity and new proposed transactions, obviously, you never know how much of that's going to make this year or next year. But I still think, Devin, the main driving factor besides financing, getting a little bit better is just how long in the tooth some of these funds have been without returning liquidity and I think the longer that time goes on, the more pressure they get from LPs, the more realistic valuations become. And we're certainly feeling that, and there's more funds that are specifically trying to get a particular deal done. What I would say about the sponsor deals, while all that feels good, it's still not super easy at the end of the road when you're trying to close a deal where we used to have multiple bidders at the end of the process. The processes are still thin, but I would say we are now in a functioning private equity deal market, the calendars definitely open up, pitches are happening more and it's sort of like we said, it's getting better. Relative to your second question about just opportunities. I think the thing we like about our advisory business is just how diverse it is across industry teams, while we just talked about depositories will that stay tough. We're doing really well in energy. We've had a nice return in our -- invested in technology and seen some nice announcements there. And I would say, frankly, our first half healthcare has been kind of slow where 10 years ago, if we were slow in health care, that would have had a bigger impact. But the diversity is pretty good. And we actually think we're going to have a pretty strong back half in health care. But I think within each one of these sectors, especially when it comes to the sponsor community, there's sort of tremendous focus on particular areas. And I would just highlight as an example, the team we just hired in Michigan, they're going to be part of our diversified industrials and services team, and they specifically spend all their time with sponsors in commercial and residential services. So that's a pretty small sliver. Another area we invested in is auto aftermarket. That's a small sliver. So I would say within each of these industry groups, this tremendous depth and focus is really important. And there's quite a bit of runway in many of the industry groups.
Q: And then a follow-up here, probably for Deb, just on fixed income brokerage. Appreciate participants are waiting for more certainty on interest rates. The backdrop is still relatively challenged, but then I also heard the comment about optimism that the markets are improving. So I'd just love to -- I think I've asked this question several times, over the last couple of years, but just how we should think about what a more normal level of business is for Piper in fixed income brokerage. Is that $50 million or so a quarter? And then how do you think about the inputs into the algorithm for intermediate term growth off of that. So once we get to something more normal, whenever that happens, what does this business growth look like? Is it mid-single digits, upper single digits? Or how should we think about the actual growth of the underlying business based on the wallet and then what Piper is specifically doing?
A: I think it's hard to predict the timing of when. I think your $50 million a quarter is really in the ballpark of what would be sort of a normalized fixed income business, if there is such a thing anymore. But I would also say then off of that from a growth perspective, we are looking -- we've made some hires in municipals and continue to, even though that's been a strength for us, focus on some areas, maybe softer yield just below IG and having increased capabilities there as well as leveraging more technology. We're also looking at and have not yet completed everything we'd like to do relative to growing out structured credit sort of the nongovernment backed to the RMBS, ABS, CLO, those types of products. We also think we have significant opportunity in loan strategies where we have strength there, but see the opportunity both with our bank coverage and in particular, even the nonbank coverage to do more there. So those are areas of focus that we're looking at as we move forward.
Q: And then I just had one last question here. I received the question just around kind of the back half guidance for the M&A advisory business. I believe it sounded like third quarter should be similar to second quarter was maybe a little bit of upside and then fourth quarter, hopeful that
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
