Piper Sandler : Second Quarter Earnings Release

Piper Sandler Companies Reports Second Quarter 2020 Results

MINNEAPOLIS-July 31, 2020-Piper Sandler Companies (NYSE: PIPR) today announced its results for the second quarter of 2020.

"We delivered strong results in the second quarter highlighted by our financial services group, record healthcare equity capital raising activity, and continued momentum in our public finance and brokerage businesses," said Chad R. Abraham, chief executive officer. "The diversification and scale of our business is driving solid results with over $500 million of net revenues for the first half of 2020 as we continue to navigate the pause in M&A activity."

			Second Quarter 2020 Results
		U.S. GAAP				Adjusted (1)
		Q2	vs.	vs.			Q2		vs.	vs.
(Dollars in millions, except per share data)		2020	Q1-20	Q2-19		2020		Q1-20	Q2-19
Net revenues	$	292.4	24%	70%		$	292.7		19%	80%
Net income applicable to Piper Sandler Companies	$	1.5	N/M	-86%		$	34.5		36%	82%
Earnings per diluted common share	$	0.10	N/M	-86%		$	1.93		30%	46%

1. A non-U.S. GAAP ("non-GAAP") measure. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see "Reconciliation of U.S. GAAP to Selected Summary Financial Information." We believe that presenting our results and measures on an adjusted basis in conjunction with U.S. GAAP measures provides the most meaningful basis for comparison of our operating results across periods.

FINANCIAL & BUSINESS HIGHLIGHTS

• Net revenues of $292.4 million for the second quarter of 2020 reflect strong contributions from our financial services group, record corporate capital raising, and robust municipal financing activity.
• • Corporate financing revenues of $83.4 million for the second quarter of 2020 increased more than three-fold compared to the sequential quarter. Our healthcare franchise led the quarter by completing a record 33 deals, of which 28 were book run.
  • Our top-ranked financial services investment banking franchise contributed strong results for the quarter by advising on 18 M&A transactions and completing 34 debt and preferred transactions.
  • Public finance generated $30.8 million of municipal financing revenues for the second quarter of 2020, ranking No. 1 in the negotiated market based on number of issues and No. 5 based on aggregate par value.
• For the first half of 2020, net revenues of $528.6 million increased 49% compared to the prior year as our combinations with Sandler O'Neill and Weeden & Co. continue to provide diversification, scale and durability across our platform, even in challenging markets.
• • Corporate investment banking revenues of $305.4 million for the first half of 2020, which include advisory services and corporate financing activity, reflect strong contributions from our market-leading healthcare and financial services franchises.
  • Fixed income services generated revenues of $90.0 million for the first half of 2020 more than doubled compared to the prior year period. The addition of the financial services group and their deep relationships with banks combined with our municipal expertise continues to drive strong performance.
  • Equity brokerage generated revenues of $88.5 million for the first half of 2020, surpassing full year 2019 revenues, as clients value our scaled platform that combines top-ranked research, trading, and capital markets capabilities.
• On a U.S. GAAP basis, our results were impacted by higher acquisition-related expenses. We recorded net income of $1.5 million, or $0.10 per diluted common share, for the second quarter of 2020, and on a year-to-date basis, we recorded a net loss of $13.3 million, or $0.96 per diluted common share.
• On an adjusted basis, our results reflect strong performance and the accretive benefit, both strategically and financially, of our recent acquisitions. We recorded adjusted net income of $34.5 million, or $1.93 per diluted common share, for the second quarter of 2020. For the first half of 2020, adjusted net income of $59.9 million increased 46% compared to the prior year, and adjusted earnings per diluted common share of $3.35 increased 18% year-over-year.

STRATEGIC UPDATES

• On April 3, 2020, we completed the acquisition of The Valence Group, a premier international investment bank specializing in the chemicals, materials and related sectors.
• • Adds an industry-leading advisory practice to further broaden and diversify our platform, and strengthens our presence in Europe.
  • The new Piper Sandler chemicals & materials group was formed, including all nine managing directors that joined the platform.

CAPITAL

• Returned $36.3 million to shareholders on a year-to-date basis through dividends and share repurchases.
• Declared a quarterly cash dividend of $0.30 per share, which will be paid on September 11, 2020 to shareholders of record as of August 28, 2020. This dividend represents an increase over the previous quarter but is balanced with our focus of prudently managing capital and maintaining our balance sheet strength and flexibility during this time of uncertainty.

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U.S. GAAP SELECTED FINANCIAL DATA

The following summarizes our results on a U.S. GAAP basis.

		Three Months Ended		% Change vs.		Six Months Ended	%
	June 30,			Mar. 31,		June 30,		June 30,		June 30,
(Dollars in thousands, except per share data)		2020			2020			2019		Q1-20		Q2-19			2020			2019		Change
Revenues
Advisory services	$	85,569	$	111,226	$	75,238	-23%	14%		$	196,795	$	190,117	4%
Corporate financing		83,448			25,176			25,718	231%	224%			108,624			39,234	177%
Municipal financing		30,810			22,596			17,783	36%	73%			53,406			30,449	75%
Investment banking		199,827			158,998			118,739		26%		68%			358,825			259,800		38%
Equity brokerage		40,644			47,853			15,468	-15%	163%			88,497			31,374	182%
Fixed income services		48,695			41,290			16,736	18%	191%			89,985			35,795	151%
Institutional brokerage		89,339			89,143			32,204		-%		177%			178,482			67,169		166%
Interest income		3,065			6,065			6,863	-49%	-55%			9,130			14,430	-37%
Investment income/(loss)		3,733			(13,826)			17,605		N/M		-79%			(10,093)			19,197		N/M
Total revenues		295,964			240,380			175,411	23%	69%			536,344			360,596	49%
Interest expense		3,526			4,212			2,993		-16%		18%			7,738			5,636		37%
Net revenues	$	292,438	$	236,168	$	172,418	24%	70%		$	528,606	$	354,960	49%
Non-interest expenses
Compensation and benefits	$	213,560	$	188,124	$	102,476	14%	108%		$	401,684	$	219,603	83%
Non-compensation expenses		71,481			82,073			49,017	-13%	46%			153,554			91,295	68%
Non-interest expenses	$	285,041		$	270,197		$	151,493		5%		88%		$	555,238		$	310,898		79%
Income/(loss) from continuing
operations before income tax	$	7,397	$	(34,029)	$	20,925		N/M	-65%		$	(26,632)	$	44,062		N/M
expense/(benefit)
Ratios and margin
Compensation ratio		73.0 %			79.7 %			59.4 %							76.0 %			61.9 %
Non-compensation ratio		24.4 %			34.8 %			28.4 %							29.0 %			25.7 %
Pre-tax margin		2.5 %			-14.4 %			12.1 %							-5.0 %			12.4 %
Amounts applicable to Piper
Sandler Companies
Net income/(loss) from continuing
operations	$	1,454	$	(14,727)	$	12,555		N/M	-88%		$	(13,273)	$	32,116		N/M
Loss from discontinued operations		-			-			(2,166)		-%		N/M			-			(2,305)		N/M
Net income/(loss)	$	1,454	$	(14,727)	$	10,389		N/M	-86%		$	(13,273)	$	29,811		N/M
Earnings/(loss) per diluted
common share
Income/(loss) from continuing	$	0.10	$	(1.07)	$	0.87		N/M	-89%		$	(0.96)	$	2.18		N/M
operations
Loss from discontinued operations		-			-			(0.15)		-%		N/M			-			(0.16)		N/M
Earnings/(loss) per diluted common	$	0.10	$	(1.07)	$	0.72		N/M	-86%		$	(0.96)	$	2.02		N/M
share

N/M - Not meaningful

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Revenues

For the second quarter of 2020, net revenues of $292.4 million increased 24% compared to the first quarter of 2020 and 70% compared to the second quarter of 2019.

Investment banking revenues of $199.8 million for the second quarter of 2020 increased 26% compared to the sequential quarter and 68% compared to the second quarter of 2019.

• Advisory services revenues of $85.6 million for the second quarter of 2020 reflect strong contributions from our financial services industry group. Revenues in the current quarter declined 23% sequentially driven by lower revenue per transaction and a challenging M&A market environment. On a year-over-year basis, revenues increased 14% due to more completed transactions. The uncertainty associated with COVID-19, and the potential near- and long-term impacts on the economy, continue to influence M&A activity market-wide, as evidenced by the decline in number of announced deals in the market. While we expect this dynamic to continue for the remainder of the year, we believe the breadth of our products and diversification of our platform will continue to drive activity, albeit at levels lower than recent years.
• Corporate financing revenues of $83.4 million for the second quarter of 2020, which include equity and debt financing for corporate clients, represent a record high and an increase of over 200% compared to the sequential and year-ago quarters. Revenues for the current quarter resulted from record equity capital raising activity for us and the overall market, particularly in healthcare. Following the halt of activity experienced in March, market conditions became favorable for capital raising during the second quarter of 2020 driven by a sharp rebound in valuations combined with lower volatility. Our market-leading healthcare franchise completed a record number of book run deals for biopharmaceutical companies driving strong relative performance and market share gains. In addition, debt financing activity increased during the quarter and our financial services franchise completed more book run debt offerings compared to the first quarter of 2020. Our pipeline remains strong and we expect activity will continue as long as market conditions remain favorable.
• Municipal financing revenues of $30.8 million for the second quarter of 2020, which represent our public finance underwriting business, increased 36% compared to the first quarter of 2020 and 73% compared to the second quarter of 2019. Revenues for the second quarter of 2020 were driven by robust issuance activity within the governmental space, which benefited from low interest rates and strong investor demand in a more stabilized market environment. While issuance in the negotiated market for the second quarter of 2020 increased approximately 25% on a sequential basis, activity was concentrated in our areas of expertise which allowed us to gain market share and out-perform on a relative basis.

Institutional brokerage revenues of $89.3 million for the second quarter of 2020 were flat compared to the first quarter of 2020 and increased 177% compared to the prior-year quarter.

• Equity brokerage revenues of $40.6 million for the second quarter of 2020 decreased 15% compared to the strong first quarter of 2020 and increased 163% compared to the year-ago quarter. Though institutional activity declined on a sequential basis, volumes remained elevated from historical levels, which drove solid results for the second quarter of 2020. We continue to leverage our expanded client base, execution expertise, and product capabilities to find liquidity for our clients. We expect client activity to decline from first half levels as we are starting to see volatility subside and the market historically experiences a slowdown during the summer months.
• Fixed income services revenues of $48.7 million for the second quarter of 2020 increased 18% compared to the first quarter of 2020 and 191% compared to the prior-year quarter. Revenues for the second quarter of 2020 were driven by continued strong activity across various client verticals as we continue to provide advice on repositioning balance sheets, maximizing yields and managing risk. In addition, revenues for the current quarter reflect improved trading performance compared to the first quarter of 2020. We expect activity to remain strong as clients continue to reposition in a changing market.

Investment income of $3.7 million for the second quarter of 2020 compared to a loss of $13.8 million for the first quarter of 2020 and investment income of $17.6 million for the second quarter of 2019. The current and prior period quarters include amounts attributable to noncontrolling interests. For the current and year-ago quarters, investment income primarily related to gains recorded in our merchant banking portfolio. For the first quarter of 2020, we recorded unrealized losses related to this portfolio as the carrying value was marked down to reflect lower equity valuations.

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Non-Interest Expenses

For the second quarter of 2020, non-interest expenses of $285.0 million increased 5% compared to the first quarter of 2020 and 88% compared to the prior year quarter.

• Compensation ratio of 73.0% for the second quarter of 2020 declined compared to the first quarter of 2020 as the result of higher net revenues. The compensation ratio for the current quarter increased compared to the second quarter of 2019 driven by $27.8 million of acquisition-related compensation expense related to restricted consideration and retention awards associated with the acquisitions of Sandler O'Neill and The Valence Group, and the earn out associated with the acquisition of Weeden & Co.
• Non-compensationexpenses of $71.5 million for the second quarter of 2020 decreased 13% compared to the sequential quarter driven primarily by lower acquisition-related expenses. Non-compensation expenses for the current quarter increased 46% compared to the second quarter of 2019 driven by the addition of our recent acquisitions to the platform and intangible asset amortization expense of $11.6 million.

Pre-Tax Income

For the second quarter of 2020, we recorded pre-tax income of $7.4 million compared to a pre-tax loss of $34.0 million for the first quarter of 2020 and pre-tax income of $20.9 million for the second quarter of 2019.

• Pre-taxmargin of 2.5% for the second quarter of 2020 improved compared to negative 14.4% for the first quarter of 2020 as the result of higher revenues and lower non-compensation expenses. Pre-tax margin for the current quarter declined compared to 12.1% for the second quarter of 2019 driven by an increased compensation ratio resulting from higher acquisition-related compensation.

Net Income & Earnings Per Share

For the second quarter of 2020, we recorded net income of $1.5 million, or $0.10 per diluted common share. Results for the quarter were impacted by meaningfully higher acquisition-related expenses and a higher effective tax rate.

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