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Edited Transcript of PJC earnings conference call or presentation 1-May-20 1:00pm GMT

Q1 2020 Piper Sandler Companies Earnings Call

Minneapolis May 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Piper Sandler Companies earnings conference call or presentation Friday, May 1, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad R. Abraham

Piper Sandler Companies - Chairman & CEO

* Debbra Lynn Schoneman

Piper Sandler Companies - President, MD & Director

* Timothy Lee Carter

Piper Sandler Companies - MD & CFO

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Conference Call Participants

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* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Michael C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Piper Sandler Companies conference call to discuss the financial results for the first quarter of 2020. (Operator Instructions) 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 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.

This call will also include statements regarding certain non-GAAP financial measures. The non-GAAP measures should be considered in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release is available on the Investor Relations page of the company's website or at the SEC website. As a reminder, this call is being recorded.

And now I'd like to turn the call over to Mr. Chad Abraham.

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [2]

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Good morning, everyone. Deb Schoneman, our President; and Tim Carter, our CFO; and I would like to thank you for joining our first quarter 2020 call. We hope you and your families are staying healthy and safe. We will go through our prepared remarks and then open up the call for questions.

First, let me start by thanking all of my employee partners. I continue to be impressed by your hard work, perseverance and determination during these unprecedented times. Your continued display of incredible partnership with one another and dedication to our clients is remarkable. Deb, Tim and I were with you at the end of January, discussing record 2019 results and our optimism for 2020 as all of our businesses started the year strong. But as we entered March, it became increasingly apparent that the impact of COVID-19 would change our world.

On March 11, the World Health Organization characterized the COVID-19 outbreak as a global pandemic. The rising uncertainty wreaked havoc in the equity and fixed income markets, and the volatility and the speed of change was historic and unprecedented. The human toll this pandemic has inflicted in terms of lives and economic hardship is staggering. It is difficult to overstate how profound the world has changed in the last 8 weeks.

We are doing our part in response to COVID-19 while continuing to focus on the needs of our stakeholders. Our first and top priority continues to be the health and well-being of our employees. We shifted to a remote working environment, with over 90% of our employees working from home, and have expanded certain employee benefits for those impacted by COVID-19.

For our clients, we are focused on delivering the best guidance in service. We are in constant communication with our clients, sharing best practices, discussing the impact of this environment on their strategic initiatives, evaluating current and future capital needs and finding liquidity in rapidly changing markets. Our technology infrastructure has been resilient, supporting our remote workforce and this surge in activity.

For our shareholders, we are prudently managing capital and costs. We entered this crisis with a strong balance sheet and ample liquidity, and we are taking actions to reduce costs, maintain liquidity and preserve capital to ensure we remain in this position as we believe this strength will be our advantage in this current environment and beyond.

For our communities, we established a special employee giving campaign with a corporate match program. Contributions will support local food banks in each of our major markets.

Let me provide some overall comments on our financial results before turning to our corporate investment banking businesses. For the first quarter of 2020, we generated $245 million of adjusted net revenues. This quarter marks the first quarter with Sandler on our platform, and they performed very well. Our financial services business has a broad

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which allows for more consistent performance across varying market cycles. It is worth noting as we go through these difficult times how the legacy Sandler team performed during the last crisis. Sandler was the most active financial adviser in recapitalizing banks and restructuring their balance sheets. In addition, we have already seen significant referrals and closed a health care M&A deal in April that was referred by our financial services team.

As I noted at the outset of the call, the year began with solid performances through February. And as extreme volatility struck in March, our investment banking businesses slowed appreciably, while our brokerage businesses delivered strong revenues.

The breadth of the Sandler financial services group and deep expertise with banks contributed to our strong fixed income revenues in the quarter. On the equity side, the expanded platform we built last year in terms of account coverage and execution capabilities through our acquisition of Weeden was a significant driver of the impressive Q1 performance this business delivered.

From where we sit today, the timing and path to recovery from COVID-19 and its related effects remain unclear, and we expect some of our businesses to be impacted meaningfully for the remainder of the year.

Turning now to advisory services. We generated $111 million of revenues for the first quarter of 2020, down from a very strong fourth quarter of 2019 and in line with the year ago quarter, which included a couple of large fees. Our health care team was the largest contributor in the quarter, followed by the financial services group and a solid contribution from the consumer team. We advised on 57 transactions with an aggregate value of $7.6 billion. Activity in the market, both announced and completed deal values, were down approximately 30% sequentially. We expect M&A revenues to decline in the second quarter as companies evaluate the changing and uncertain environment and transactions take longer and become more difficult to close.

Turning now to corporate financing, which includes both equity and debt capital raising for our corporate clients. Corporate financing activity generated revenues of $25 million for the first quarter of 2020, led by our health care team. Revenues in the quarter declined compared to a strong fourth quarter and increased compared to the prior year quarter as the result of more book run deals. The heightened volatility in March shut down equity capital raising activity. Our corporate financing activity has started out strong in the second quarter as we have already completed several equity financings in the health care space.

Debt financing has also started to show signs of improvement and we are excited about our prospects, especially in the financial services sector to assist clients raising debt to manage through this challenging environment.

Let me finish with some updates on our strategic initiatives and headcount for investment banking. As we discussed before, our partnership with Sandler is off to a great start with wide collaboration across business areas. We believe we are a destination of choice for talented professionals and high-quality franchises looking to grow their businesses. During the quarter, we hired 3 investment banking managing directors to our diversified industrials and services group. We ended the quarter with 128 investment banking managing directors, and our platform represents one of the broadest in the middle market. This headcount includes our largest class of MD promotes. Developing our own talent is the most sustainable and profitable growth, and we remain focused on building from within.

Lastly, in February, we announced our plan to acquire The Valence Group, a premier international investment bank specializing in the chemicals, materials and related sectors. The Valence Group consists of 29 professionals with offices in New York and London. The acquisition, which closed in April, strengthens our presence in Europe, another strategic priority, while adding another industry-leading advisory practice to our platform.

We believe that the acquisitions of Sandler, Weeden and Valence have collectively strengthened our platform by adding scale and diversification, broadening our industry verticals and expanding our product capabilities. Working through the current environment and its challenges has reinforced for us the importance of each of these attributes.

As we look ahead, we are mindful of the volatility and challenges in our markets and for our clients. Despite a difficult operating environment in the near term, our long-term strategy of building enduring market-leading franchises has not changed. Deep sector expertise built on multi-decade relationships is more important than ever in this environment.

Within the middle market, we have one of the broadest and deepest footprints. For example, Refinitiv rankings of mid-market M&A at financial advisers show that for the first quarter of 2020, we were ranked #1 based on the number of announced deals in the U.S.

While near term, we expect our M&A revenues to decline, reflecting the overall market environment. We are starting to see some activity in restructuring and balance sheet advisory, and we anticipate a continued ramp in corporate equity and debt new issues. However, we don't expect this ramp in activity will fully offset the impact to our M&A business. We believe the diversification and scale of our businesses will be resilient and position us for success over the longer term.

Now I will turn the call over to Deb to discuss our public finance and brokerage businesses.

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Debbra Lynn Schoneman, Piper Sandler Companies - President, MD & Director [3]

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Thanks, Chad. Let me begin with an update on our equity brokerage business. We generated revenues of $48 million for the first quarter of 2020, up 49% on a sequential basis. Equity markets began the year with moderate volumes and rising valuations in the major indices, with the S&P 500 peaking mid-February. As the severity of the coronavirus spread, the equity markets began a rapid fall. The S&P 500 plummeted more than 30% from peak levels over the course of 4 weeks, registering its worst first quarter on record. Trading volatility spiked to record levels, with the VIX reaching 82 at its peak, driving tremendous volume.

Clients set out trusted relationships to find liquidity in these volatile market conditions, and our reputation for premier trade execution drove our results for the quarter. We traded 3.7 billion shares in Q1, up 63% from the volumes traded in the fourth quarter of 2019. The breadth of our client base allows us to cross a significant portion of our cash trades, resulting in no market impact, which is a significant differentiator for us, especially in a volatile market.

From a personnel, technology and overall capability perspective, we are well positioned to continue benefiting from the increased trading volumes. Volatility in volumes remain elevated but down from the extreme levels experienced in the second half of Q1. Similarly, we expect our equity brokerage revenues to remain strong, albeit down from the Q1 levels.

Let me turn to fixed income services. We generated revenues of $41 million in the first quarter of 2020. The fixed income markets also experienced extreme volatility in March, creating liquidity and pricing dislocations in a number of asset classes. In particular, municipal securities experienced severe dislocation, with the 10-year muni-to-treasury ratio skyrocketing to over 350% in March, the highest spread recorded to date. For us, activity was robust across products as clients repositioned in a rapidly changing market. Our financial services team contributed strong revenues as they leverage their deep expertise with banks to provide advice and assist clients in managing interest-sensitive businesses given the difficult interest rate environment as well as to find liquidity.

Our municipal product offerings saw tremendous client activity as muni funds experienced record outflows from investors in March. We were able to identify crossover buyers who entered the market to take advantage of meaningfully higher yields. The robust client activity was offset in part by trading losses in municipal securities due to the sharp sudden dislocation of the market. The Federal Reserve injected massive liquidity into the market toward the end of March, which helped stabilize the market somewhat. However, volatility and the muni-to-treasury ratios remain elevated. We expect our fixed income revenues to remain strong as clients continue to reposition in a changing market. However, similar to equities, not likely at Q1 levels.

Turning to our public finance business. For the quarter, we generated $23 million of municipal financing revenues, down from a strong Q4 of 2019 and up 78% from a slow year ago period. Our public finance business started the first 2 months of the year strong driven by new issuance and refinancing activity as rates remained low. Activity in March fell off significantly driven by the extreme volatility in the fixed income markets. We completed 146 negotiated transactions, the second most nationally, raising $3.6 billion for issuer clients in the quarter. We have a strong pipeline of governmental business. And as volatility subsides and rates stabilize, we are starting to see demand resume for high-grade governmental paper. Dramatic outflows from muni high-yield bond funds will curtail demand for higher-yielding issuers, which we expect may impact our specialty sectors.

Now I will turn the call over to Tim to review our financial results and provide an update on capital use.

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Timothy Lee Carter, Piper Sandler Companies - MD & CFO [4]

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Thanks, Deb. Let me start by highlighting 2 changes to the presentation of our expanded net revenue schedules. First, within investment banking, our financing revenues are presented as corporate financing, which includes equity and debt capital raising for our corporate clients, and municipal financing, which is our public finance underwriting business. Second, we are no longer allocating net interest revenue to our products, which allows for a more straightforward reconciliation between this revenue schedule in the face of our P&L. All historical periods have been adjusted to reflect the new presentation.

Next, let me highlight the items impacting our GAAP results this quarter as a result of our recent acquisitions. Consistent with prior periods, our GAAP results include compensation from acquisition-related agreements consisting of restricted consideration and retention awards that contain service conditions.

In addition, we have acquisition-related expenses that consist of intangible asset amortization expense and restructuring, transaction and integration costs. The increase is primarily the result of the Sandler acquisition. This quarter also includes a fair value adjustment to the Weeden earnout related to our expectations of achieving certain revenue targets as our equity brokerage business is outperforming projections.

Finally, we are adding an adjustment to our GAAP net revenues to exclude interest expense associated with our long-term debt. We believe this presentation of our adjusted net revenues aids in the comparability of our ratios and margins across periods.

Turning to our adjusted financial results. Our quarterly net revenues were $245 million, up compared to the year ago period due to the investments we have made in the business through the acquisitions of Sandler and Weeden. The first quarter of 2020 started strong in investment banking, with corporate and municipal financing revenues improving compared to a slow first quarter of 2019, with performance later in the quarter driven by our institutional brokerage businesses in response to the market volatility. These increases were offset in part by unrealized losses in our merchant banking portfolio of $4.4 million. Lower equity valuations and a more challenging operating environment for some of the portfolio companies drove the fair value adjustments. We also saw marks on investments held in our nonqualified deferred compensation plan. This is a legacy plan that is no longer active, and the marks are offset against the deferred compensation liability with no bottom line impact.

Turning to operating expenses. Our compensation ratio was 64.8% for the quarter, higher compared to previous periods due to changes in our mix of business. The mix was unfavorably impacted by the unrealized losses in the merchant banking fund portfolios and some fixed income trading losses resulting from the extreme rate volatility in March. Compensation expense will continue to remain largely variable. However, our revenue levels and mix will impact the level and variability in the ratio over the next several quarters. Anticipated revenue declines will put pressure on our historic comp ratio. Compensation levels will be managed to balance profitability and to maintain adequate compensation levels for employee retention. Quarterly noncompensation expenses, excluding deal-related expenses, were $52 million. We expect this level of noncompensation costs will decline modestly for the second quarter as travel and other variable expenses are expected to be down with lower revenue. We produced an operating margin of 11.8% for the quarter, down 300 basis points on a year-over-year basis due to the higher compensation ratio.

Our adjusted tax rate for the first quarter of 2020 was 5.1%. We recorded $5.7 million of tax benefits or $0.33 per share, principally related to the CARES Act, which was enacted by the U.S. federal government in March in response to the 2020 coronavirus pandemic. The CARES Act contains tax provisions allowing for a 5-year carryback of 2018, 2019 and 2020 federal tax years to periods when the federal tax rate was still 35%. Excluding these tax benefits would result in a 26.4% adjusted tax rate for the quarter, which is within our guided range of 26% to 28%.

For the quarter, our diluted EPS was $1.48 per share, in line with the year ago period. The increase in share count related to the Sandler acquisition was offset by the tax benefit. We expect our share count to be approximately 17.9 million for Q2, taking into account the restricted stock consideration associated with the acquisition of The Valence Group.

Turning to capital and risk management. Our capital and liquidity positions remain strong. Our leverage is low, and we are confident that we will be able to effectively navigate this environment in the current market conditions. As Chad noted, we closed on the acquisition of The Valence Group; and as planned, we drew on our revolver to finance the upfront cash consideration. Consistent with our strategy, we remain focused on making our business capital-light and carrying inventory based on client needs in our areas of expertise. At the end of the first quarter, we held approximately $578 million trading inventory and have further reduced inventory in April to approximately $500 million.

Turning to dividends. The Board approved a quarterly dividend of $0.20 per share, lower than our previous quarterly dividend as we see the benefits to our business for the long term in preserving and maintaining optionality with our capital. This quarterly dividend will be paid on June 12, 2020, to shareholders of record as of the close of business on May 29, 2020.

In summary, as we continue to adapt and respond to the changing market conditions, we are well capitalized, highly liquid and our risk posture remains conservative. We remain prudent in allocating capital and maintaining inventory levels to reflect our focus of providing advice to clients rather than use of the balance sheet.

Before going to Q&A, I'd like to turn the call back to Chad for a few additional comments.

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [5]

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Thanks, Tim. We are encouraged to have a broad diversified business that allows us to serve clients outside of just traditional M&A advice. Our investment bankers are shifting their focus to include restructuring and capital raising, both with equity and debt. We are pleased that our platform is active in the equity and fixed income markets through our sales and trading capabilities and by providing balance sheet advice. The addition of Sandler and Weeden have further diversified our business, and we are seeing the benefits of these combinations and their contributions even more so in the current environment.

As we look ahead to the remainder of 2020 and beyond, we know the near-term environment will be challenging. Our intense focus on serving our clients, supporting our employees and our broader communities just as we have done over the course of our 125-year history will help us navigate through this uncertainty.

Let me close by thanking the leadership team, and, again, all of my employee partners. It is in times like this that your collaboration, expertise and dedication is most apparent. Thanks and we can now open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Devin Ryan with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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Maybe just to start here on the investment banking outlook and appreciate, Chad, some of the commentary on the sectors. But I'm just -- maybe if we can, curious to kind of go a little bit deeper into some of the puts and takes. The energy space kind of has some of its own issues. So I'm kind of curious between the push/pull in advisory and M&A, maybe there's some restructuring activity you guys are getting involved in. But curious kind of how to think about the outlook there. You heard some of the commentary on financials, but if we can go maybe a little bit deeper.

And then health care, it would seem that it's recovering faster. There's been some recent equity issuance. I know you guys have been involved in that. So as you kind of think about all the various sector exposures, they're kind of being affected by maybe some different themes beyond just COVID. So yes, just maybe love to get a little more flavor there in terms of where things maybe are going to be more active and then maybe where things are going to be slower.

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [3]

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Sure, Devin. And obviously, there's a few questions in there. So yes, I would just start with sort of the outlook for advisory. We started, as you can see just from the tables, we announced a lot of transactions early in Q1 and certainly throughout the quarter. We're still closing those. Frankly, as we look at just what we did in April, if you just use the month of April and sort of advisory closings, that would sort of point us down probably in Q2, about 30%. But it's impossible to predict what exactly closes in this environment. But we still have a backlog of deals we expect to close. Where you're really seeing that slowdown is just announcements of new transactions and, in particular, our industries that rely on sell-side activity for private equity, industrials, parts of the consumer space. And so in those sectors, it's slower.

You're right. In certain parts of healthcare, we are still doing transactions. We -- in fact, we announced a nice transaction this week in specialty pharma. In financial services, we're still doing some transactions. And as you know, that industry has even a longer time from announcement to closing. So that backlog continues.

At certain sectors, you're right, like energy -- are very difficult from a pure M&A perspective. But we are active in restructuring. And as you know, we don't have a huge restructuring team that spends a lot of time on the bankruptcy part. But restructurings come in many different flavors, rescue financing, debt financing, equity financings as we're seeing with our financial services teams, balance sheet advisory.

And frankly, to your next question, we've seen the financing markets be quite strong in April. And in fact, April was our strongest month for ECM of the year primarily on the back of some significant health care transactions. So we really do feel blessed to have a broad, diversified business that has lots of industries that will perform differently in different markets and then certainly, a lot of products that helped that diversification.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Terrific color. And maybe one, just on kind of financial sponsors' psyche right now. You guys have great connectivity there. And clearly, portfolios have been marked down pretty substantially in recent months and so that may affect monetization time lines. I'm curious, on the other side, how they're thinking about positioning to buy assets if there is maybe an opportunity with lower asset prices to kind of help capitalize certain industries or take advantage of opportunities where firms may have to sell assets in distress or just are repositioning their overall kind of asset composition. So just trying to think about kind of the push/pull between lower asset prices, how that's affecting sponsors' kind of existing portfolios, but also kind of the thoughts around being buyers just with an elevated level of dry powder?

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [5]

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Yes. I think that is a great question. And it really depends on sort of the state of where each of these private equity firms is within their particular fund. Obviously, the funds that were close to fully invested hadn't invested a new fund. As we saw, certainly, the last couple of weeks of March and the first week of April, people were very focused on, "What are we going to do with our existing portfolio of companies? Where are we at? What's the debt load? How is it going to work?" And certainly, we're not talking about new transactions. The flip side of that is there are a lot of private equity firms that have a lot of dry powder, and we've certainly seen them start to look at things and think about being opportunistic. And that may not be in their traditional sort of, "I got to own control." It might be in a rescue financing. It might be in a different structure. And then I would say, probably the biggest opportunity, at least in the short term for us with private equity sponsors, is we have a lot -- as you know, we have a big sort of debt advisory business for sponsors. And we have lots of conversations and new engagements relative to helping them with their current debt loads in particular portfolio of companies.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [6]

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Okay. Great. And maybe to pivot a little bit to the brokerage business. Clearly, strong quarter there and, I think, shows kind of the benefits of diversification of the model. And there's also benefits from having Sandler in the business as well. So there's a lot to kind of consider in the result this quarter. Weeden as well. I don't know if there's a way to kind of parse through kind of the portion that maybe was tied to kind of higher than a normalized level of volume. Or any way just to kind of think about that business to the extent the view is the markets start to settle down. Volatility reduces, volumes probably come back, revert to something maybe closer to where they were previously. And so just trying to think about that business in more of a normalized backdrop, also, I guess, contemplating the fact that maybe there was some inventory marks either way this quarter as well. So just trying to kind of conceptualize what that potentially could look like if we think the world is normalizing a bit.

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Debbra Lynn Schoneman, Piper Sandler Companies - President, MD & Director [7]

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Yes. Devin, let me take it. I think your questions really relate both to equity and fixed income as I listened to that. So let me just take each of those one at a time here.

On the equity side, absolutely correct. There was definitely an increase in revenues driven by the volumes and volatility that we saw, and that has come back and stabilized somewhat. So as we noted, I do expect revenues to come down as we move into Q2. I guess I would say it's like the combination of Weeden and now Sandler coming in, while they're not at Q1 levels, I mean, there has been a build from what we would have seen, call it, the second half of '19 as we had integrated Weeden. And so I don't know if that gives you some color, but that's how I think about the equity side.

On the fixed income side, obviously, a much more significant impact from the integration with and the combination with Sandler, a very strong fixed income business. And that probably makes a little more difficult on that side. I think one of the ways to think about that business -- and as you noted, some marks on portfolio and some trading losses that we did take there given the massive dislocation, the speed of that dislocation in the municipal market. A way to think about it is that the losses that we did take offset a meaningful portion of that upside that we saw coming in from increased activity with clients, again, driven by volatility and all of the dislocation that happened. So going forward, we do see -- as markets settle in a little bit, we still see really solid client activity, I would say, especially on the municipal side, but that has come in somewhat. At the same time, we don't expect going forward that we would see that level of trading loss as we move into Q2. So there's a bit of a balance there.

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [8]

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Yes. And, Devin, I would -- yes, I would just add, obviously, on Sandler's part of the business, there's no sort of inventory and capital use. So very strong Q1. And frankly, both parts of the fixed income business, the muni business and the Sandler, working with the banks and financial institutions is off to a good start in April. So while I think equities will moderate with less volatility in volumes a little more, we actually expect continued strength in fixed income into Q2 and probably longer here.

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Debbra Lynn Schoneman, Piper Sandler Companies - President, MD & Director [9]

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And, Devin, maybe wanted to add -- I would just add on there, too. As Chad noted, and actually, Tim noted in comments earlier, around the reduction of inventory. And as I'm sure you recall, it's a strategy we really started last year, too: reduced risk on that side of the business; reduce the capital used, really in line with our vision of being more advisory and shifting to really advice and strategic advisory business around client verticals. And I would say this quarter, both with the -- bringing the Sandler team on board and their historical way of doing fixed income business without capital, we're learning a lot from that. And I just think the volatility in the market has just increased our desire to really focus any inventory we have on what is really needed for client business.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [10]

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Great. Helpful color. Maybe to pivot again here to the debt underwriting, the public finance, municipal financing part of the business. Your rates have obviously pulled back pretty substantially and abruptly. And do you try to think about the outlook there? The tax reform, you changed the ability to kind of advance or refinance. And so trying to think about kind of some of the push/pulls in terms of funding needs and whether this is actually going to be a better environment once markets settle down a little bit for activity there just with where rates are. Any color would be helpful.

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Debbra Lynn Schoneman, Piper Sandler Companies - President, MD & Director [11]

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Yes. Devin, the -- we have seen issuance start to pick up in April from March, but clearly not where we were before. And there is definitely a push/pull as you speak to, and I would say even in different sectors being able to take advantage of what's available in the marketplace today. We're seeing the higher-quality government paper pricing, and we have a good pipeline there. You're seeing, I think, overall decent demand for that in the marketplace. Relative to rates, especially some of the business we do is on the taxable side as well with these entities, and there's a little bit of pressure there in terms of the ability to get refinancing done at the levels we're seeing.

Net-net, as I think about this business going forward, you're going to have some credit concerns, especially in some of the larger states or specialty areas. And in areas like our middle market business, smaller city school districts that rely more on property taxes as the tax base, there's a little more stability there. So net-net, we're cautiously optimistic on the market overall. But if I think about where the business was last year versus this year, there's probably some drop in overall market issuance. More so than anything, we're really trying to understand the depth of the buyer base out there.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [12]

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Right. Okay. Great. And maybe last one for Tim, just on expenses. So I heard the commentary on the comp ratio and appreciate that the revenue outlook is maybe a bit more clouded and more challenged today than heading into the year. So I guess I'm just trying to think about the first quarter accrual. Is that the best expectation for the year? So we should assume that something in this type of range is reasonable as a run rate? Or is there conservatism there just given the uncertainty? I'm just trying to think about how you guys contemplated where the comp ratio was set for the quarter and implications of that.

And then on, I guess, noncompensation, any kind of thoughts around levers within that, that you would maybe pull here or just assuming that there would be lower in the near term, just given lower T&E. So just any other things to think about, both on compensation and noncompensation?

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Timothy Lee Carter, Piper Sandler Companies - MD & CFO [13]

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Yes. Devin, let me take that. So from a comp perspective, I actually think over the next couple of quarters, as I noted, we will likely see some elevated rate versus our stated range. But I'd probably think about it a little bit in terms of what our range has been, sort of 62% to 63%, and where we were for Q1 that we may end up somewhere in between there, maybe a little bit higher there in the next quarter or 2. And then it moderates back down towards our more normal range later in the year as we would expect maybe to see a little bit more bounce back from a revenue perspective.

Certainly, the first quarter was impacted as well by the merchant banking marks and some of the fixed income losses that Deb talked about. We would have been sort of in our guided range in Q1 without those. But the next couple of quarters, it's going to be a little bit higher, but I wouldn't expect it any more than where we were Q1.

And then I think from a noncomp perspective, yes, I do think -- I mean, there's a couple of pieces to that. One is certainly the -- just overall slowdown in business activity and some of those variable type expenses related to travel and those types of things that will likely bring noncomps down over the next couple of quarters. I mean there are some other things that we have looked at in terms of trying to

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that wouldn't have as much impact from a business perspective, and we'll consider some of those things. But I think over the next quarter or 2, versus where we were in Q1, you could see sort of noncomps down another 10% or so based on those factors.

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Operator [14]

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Your next question comes from Mike Grondahl with Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [15]

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So maybe just one follow-up. In terms of the M&A environment, Chad, what are you kind of looking for to get a sense for if it's falling or if we're going to get turn here? What are some things we can watch or hope for?

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [16]

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Yes. Yes. And I think, grandly, that's probably the hardest question of all. And I always just got to remind people when we say advisory services, M&A is a piece of that, but so is restructuring, so is balance sheet advisory, so is DCM advisory, so is private placements for equity, so is rescue financing. So M&A is a piece of that total advisory. It's a large piece, but some of those other factors will offset the drop-off in pure M&A.

Like I said, we're -- we've actually continued to see in April a decent run rate of closings, and we've got visibility into May and June. What's harder to predict is just the traditional sell-side M&A process, where we're working with the company, and we're going to launch those sales to private equity. For us to do that and advise a client, we're going to want to make sure we can get good client outcomes and hit the expectations. And I think for that, that's just going to come from conversations with private equity clients. We will host fireside chats. We'll sort of know where we're going to be with those processes. And we certainly haven't started to launch many of those. Obviously, if we continue to see the improvements we've seen in the capital markets, we would hope by later this summer that we would launch some of those and see an impact towards the end of Q3 and Q4 in our results. But that -- of all the questions, that's the toughest to predict.

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Operator [17]

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Your next question comes from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [18]

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So most of my questions have been covered, but I'd like to ask about the dividend. So I was hoping to get a little bit more color there. I guess why make the decision to reduce the dividend now just given the fact that you did have good results this quarter? So just kind of interested to hear a little bit more about the timing. And then if the environment or your results actually turn out to be a little bit better than maybe you're kind of currently expecting, do you anticipate bringing the dividend back up to, say, prior quarter levels, essentially implying that it's kind of a temporary change? Or is this kind of lower level the right run rate for you guys going forward?

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [19]

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Yes. Obviously, there's no perfect science to this question. I think what we were trying to do was just being balanced and prudent and conservative relative to capital positions. And maybe just as a reminder, we really view excess capital in a few ways. We really -- we like to invest in growth and new franchises and opportunities. And I would -- just to remind people, we had, for years, significant excess capital. Obviously, we used some of that excess capital with Sandler. We used some of that excess capital with Weeden and with Valence. So we continue to use cash in that way. Obviously, we can't find enough ways to put that capital to work, so we instituted the dividend. And I would say we're still very committed to that dividend policy. And that dividend policy gives us some flexibility to make it up at the end. Again, our dividend policy is 30% to 50% of earnings. And we would expect to be in that range. Maybe relative to that range, just given all of our acquisition activity, we'd be towards the bottom end of that. But we do expect to continue to pay the dividend and use that policy. And then we've also sort of had the third level, which is being opportunistic on buybacks. And we'll continue to balance that.

So for us, again, there wasn't perfect science around it. We were trying to be conservative. And we'll evaluate that each quarter.

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Operator [20]

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There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

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Chad R. Abraham, Piper Sandler Companies - Chairman & CEO [21]

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Okay. Thanks, everyone. We look forward to updating you again next quarter. Stay safe and be well. Thanks again.

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Operator [22]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.