Greenhill & Co., Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day. And welcome to the Greenhill First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Patrick Suehnholz, Director of Investor Relations. Please go ahead.

[Patrick Suehnholz:]

Thank you. Good afternoon. And thank you all for joining us today for Greenhill’s first quarter 2021 financial results conference call. I am Patrick Suehnholz, Greenhill’s Head of Investor Relations and joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.

[Scott Bok:]

Thank you, Patrick. We reported first quarter revenue of $68.9 million, operating profit of $7.2 million and net income per share of $0.09. Our quarterly revenue was 3% higher than last year and our operating profit and earnings per share compared to a loss last year. Given that this quarter followed one where we had our best quarterly revenue ever, we see these as respectable results that mark a solid start to the year. We are also pleased that after quarter end, we further accelerated the pay down of our debt and that we have made good progress toward our recruiting goals. I will now comment very briefly on our operations as we continue through the pandemic, then on the state of each of our businesses, then speak on each of our key financial metrics. As I have said in each recent quarterly call, our firm has operated well throughout the pandemic. At this point, most of our offices have at least some people back from home and some are operating fairly normally. In-person, the tenants will naturally grow as more people get vaccinated and the virus risk declines both generally and particularly for our people most of whom I expect have been or will be vaccinated. To the extent people are still working from home and maybe for some time to come, we have proven that we can be very effective at both executing for existing clients and winning new clients in that format. But we do think working from the office is better for our team’s productivity, efficiency, training, morale and other reasons. So our goal is to get largely back to that over the next few months in most of our office locations.

[Operator:]

The first question comes from Devin Ryan with JMP Securities. Please go ahead.

[Devin Ryan:]

Great. Good afternoon, Scott. How are you?

[Scott Bok:]

Very well, Devin. How about you?

[Devin Ryan:]

Doing great. I guess first one here just on the outlook appreciate some of the commentary. If we go back I think last quarter’s call, you talked about being disappointed if revenues didn’t grow year-over-year in 2021. So I am just kind of curious when you put the kind of outlook together, is that still kind of the view and how have things evolved in the environment over the past few months, I guess, since the last call that we did with you?

[Scott Bok:]

I think my view would be the same as it was a few months ago. I mean, I still feel like we are in kind of as I have said last quarter that restructuring clearly has slowed as financing markets have become so strong. We are trying to do more in the financing spaces as opposed to bankruptcy type restructuring. And on the M&A side, if anything I am probably pleasantly surprised by how strong activity is right now. It is heavily weighted, I would say, toward the U.S. market, but I really think that’s a function of the pandemic. I mean for example, Australia also very busy for us right now and Australia of course is even ahead of the U.S. in terms of coming out of the pandemic. So it really seems like there is a positive trend maybe better than I might have thought three months ago in terms of as countries come out of the pandemic like Australia clearly has and clearly the U.S. is on its way toward that, you do get a sharp rebound in M&A activity and we are certainly hopeful that Europe follows that trend in the months as it comes out as we go forward as well.

[Devin Ryan:]

Yeah. Okay. Very helpful. And then just pick up on some of the commentary on kind of the financing opportunity and what’s been a really good environment as you noted. Is that effectively taking restructuring bankers and pivoting kind of where they are focused or is it M&A bankers working with clients around financing needs or like how are you guys executing on this and I am assuming most of this activity is not showing up in kind of what we see visibly. So I am just kind of curious kind of how it’s happening and then kind of if there’s any way to track it from the outside?

[Scott Bok:]

I mean, when we do something meaningful and it’s known publicly of course we do at least put it on our website even if it isn’t picked up by some database you may be looking at. But it’s primarily, I would say, our -- we call our group financing and restructuring advisory and all the people in there in a year like last year really are spending most of their time on bankruptcy-related work. But those people all have tremendous experience in financing as well, obviously, not for AA and AAA rated companies, but for the companies that that tap into the alternative lending market and things like that. So that group -- it’s a great complement to what they do in times when there’s a lot of bankruptcy because the same people have the right skills and can do that in a period like now where you have got fabulous financing markets which means lots of opportunity there, but less opportunity on the bankruptcy side.

[Devin Ryan:]

Yeah. Okay. Got it. And then just last one, I was kind of writing down as you were talking earlier about, obviously, the operating margins in the quarter, but then kind of your targets in the believe mid-20s and I just want to make sure I am kind of understanding the thought process here. Is it reasonable to think that if revenues willing or revenues come in at a reasonable level this year, that you could be back into the, call it, target range or is that kind of a longer term view? I just want to make sure I kind of picked up on the way you were framing that correctly?

[Scott Bok:]

I mean it obviously margin is always going to be a function of revenue. But when we put out that target, last quarter is back to the mid-20s operating margin, I mean, we weren’t talking multiple years from now. Our objective is to get back there pretty quickly. How exactly, how quickly is obviously going to depend on how revenue materializes. But we do think that we have had a real benefit in the sense of lower non-comp costs, not just pandemic-related, but other things as well and that provides a big step forward in trying to get toward that goal.

[Devin Ryan:]

Yeah. Okay. Great. I will leave it there, but really appreciate it, Scott.

[Scott Bok:]

Sure. Thanks.

[Operator:]

And the last question comes from Richard Ramsden with Goldman Sachs. Please go ahead.

[Richard Ramsden:]

Hey. Good afternoon, Scott. So just a couple of questions for me, could you just expand a little bit on your comments on restructuring, and obviously, I know you said that, you do think it’s going to be a weaker year that’s consistent with what you said before. But has your view changed since you last spoke in terms of what you think the magnitude of the restructuring opportunity is going to be for 2021? And linked to that are some of these restructuring mandates getting executed as M&A mandates, i.e., is there a substitution between restructuring and M&A just given the benign economic outlook and the fact that financing is just so broadly available?

[Scott Bok:]

I think my view of the restructuring market is really completely consistent with what it was a few months ago. I mean clearly that was just an enormous wave of restructuring assignments that were handed out in sort of the second quarter and third quarter of last year. There were less of them handed out in the fourth quarter because the Fed had stepped in and really made the financing markets a lot better and I expected that trend to continue and it really has continued.

[Richard Ramsden:]

Okay. And then, secondly, on corporate tax reform, it’s obviously gaining a lot of momentum in the U.S. What sort of impact do you think that could have? Is it too early to say whether it’s going to slowdown M&A activity, could it act as an accelerant as people try to get ahead of it? But broadly what is your thought process around the impact of corporate tax reform in the U.S. and how important is it as a dialogue point with clients today?

[Scott Bok:]

I don’t think it really is very important. I mean, first of all, I don’t think most people expect a really dramatic change in the corporate tax rate. I think most clients I have spoken to and others expect that it’s going to be more of a compromise outcome or if there’s an increase at all, it will be something that’s more manageable. And I don’t think public companies make their decisions really based on corporate tax rates. I do think there would probably be some private companies out there, whether it’s private equity owned or whether it’s family owned, where people might decide that they want to get a deal done under a lower tax regime, so maybe it accelerates things a little bit. We had a couple of things last year that I think got accelerated because people expect that there might be higher corporate tax rates this year. But I don’t expect anything really meaningful in that sense in a positive or negative way. I just don’t think it’s going to be a big enough change to really change behavior.

[Richard Ramsden:]

Okay. And then, lastly, both strategic and financial sponsor activity has been very, very strong so far this year. As the year progresses, do you think there’s going to be a divergence between corporate activity and financial sponsor activity or do you think they got to remain heavily correlated, and perhaps, you can just update us on where you have got through in terms of building out your financial sponsor practice where you are and where you would like to be?

[Scott Bok:]

I would say, I don’t expect a big divergence between the two sides. I mean what you are seeing now is public companies getting very active in M&A. Particularly some sectors that were very quiet last year like industrials. Companies are performing well. Their earnings are way up. Their stock prices are up. I mean they are -- they can borrow very cheaply. I mean they have got really all the building blocks in place to want to do M&A. Now private equity on the other hand is sitting there with a tremendous amount of dry powder. So they are looking to do things as well and I think that you know that the sort of older view from years past that private equity sort of slows down when prices get high. I just don’t really think that’s true anymore. I mean you see private equity funds paying very high multiples for growth oriented companies in a variety of different sectors. So I am pretty optimistic about both types of M&A activity. And for us, we are certainly -- we have got some really good mandates right now for sponsors. But we are in the very early days of building out what I think could become a very significant part of our business. I hope even in the next few months there will be some more tangible successes of deals that we do for the financial sponsor community. But I think that business going to be many times bigger going forward as it is for many of our peers that focus on it a lot earlier than we did when you know when we were more concentrating on public company work.

[Richard Ramsden:]

Okay. All right. Thanks very much. That’s very helpful.

[Scott Bok:]

Okay. Thank you.

[Operator:]

And a few more questioners actually have come in.

[Scott Bok:]

Okay.

[Operator:]

If I may, first, we have Jeff Harte with Piper Sandler. Please go ahead.

[Jeff Harte:]

Hey, Scott.

[Scott Bok:]

Hey, Jeff.

[Jeff Harte:]

A couple from me. One, you mentioned Europe being slower than North America, which we are clearly seeing. What are you seeing there as far as dialogues and I guess I am trying to get to maybe what are the lack of face-to-face there is a bigger deal than it is in the U.S. as far as taking deals to the announcement stage versus kind of the underlying demand to transact?

[Scott Bok:]

I think they are -- I think part of it is related to the lockdowns and obviously they in Europe have had much longer lockdowns and kind of more severe lockdowns than we ever had in the U.S. And while it looked for a while like they were somehow getting through the pandemic better than America. It looks the opposite recently. So I think that’s having a big impact, but I think there’s also an economic phenomenon here where the U.S. economy is now roaring back, you see these quarterly results from companies and a lot of different sectors that are kind of just shockingly good. I don’t think that’s as true in Europe yet because they are looking at very difficult GDP quarters over there because of the lockdown. So I think there’s plenty of interest over there and we have seen things come roaring back in Australia. We see companies being very active in M&A in the U.S. and I think as soon as you see that turn in Europe where suddenly you know GDP is growing strongly and people aren’t quite at lockdown. I don’t see any reason why you wouldn’t have the same kind of surge of activity over there. I just think realistically it’s probably three to six months behind where the U.S. is in that progression.

[Jeff Harte:]

Okay. Excellent. And you mentioned how strong the environment is now and we will be -- we soon hear that a lot, excuse me, can you kind of maybe put that in your opinion a little bit in context and to kind of what you have seen in prior periods of cyclical strength? I mean it seems like things are exceptionally strong now even versus the past, I am wondering if you are kind of sensing that as well?

[Scott Bok:]

Yes. I would say that, one thing you learn a lot in this business and I am sure you guys all do as research analysts as well as you kind of look at the three months or four months into the year and see how M&A is trending versus past years. And picture can look very different as you get through the end of the year, because sometimes you have a very strong start, sometimes you have a strong finish. So you can’t always just annualize things and think that’s where they are going. But if you look at the first four months of this year, you would say that in Europe and the Rest of the World, it’s a little bit better than it has been in recent years and in the U.S., it’s like 50% above the best it’s ever been. I mean it’s really pretty extraordinary levels of deals and I have always looked at sort of the number of $500 million or greater transactions. That’s certainly off to a record pace by a significant margin in the U.S. or if you look at deal volume, it’s the same thing. So the U.S. is really a standout and I think it’s important to look at it regionally, because globally, yes, the numbers look strong. But if you break it out regionally, what you see is really just kind of extraordinary level of activity in the U.S., and frankly, just a little bit better than the Rest of the World. But again, I think, as Europe comes out of the pandemic, hopefully, they will catch up.

[Jeff Harte:]

Okay. Thanks.

[Scott Bok:]

Thank you.

[Operator:]

And sir, currently, the last questioner is Michael Brown with KBW. Please go ahead.

[Michael Brown:]

Okay. Great. Thank you, Operator. Hey, Scott, I just wanted to start on SPACs. Obviously, that’s been kind of the hardest trend in the capital markets over the last few months, obviously, going through some indigestion at the current moment. But we saw that in the first quarter, it looked like you guys were involved in some transactions. So, just wanted to hear you talk a little bit about Greenhill’s capabilities there, is that an area that you are looking to do a little bit more investments in? And then what is kind of your expectations for how the M&A side of the market there, as the sponsors find targets, how that will play out and how that could play out for Greenhill?

[Scott Bok:]

Well, we have certainly been quite active in SPACs and spent a lot of time on it. We have just a lot of dialogues going on related to SPACs. And there’s kind of two types of roles, at least as we see it, and I suspect other firms probably see similarly. I mean, if you are on the buy side for a SPAC, I think there tend to be a lot of advisors involved in the fees -- they are nice to have and the credentials are nice to have but they are not extraordinary. The better role in terms of economics is to be on the sell side, selling something into the SPAC community and we have had some of those as well, some pending others kind of in earlier stage pipeline and those are very attractive because you have got a lot of SPACs looking to make acquisitions and frankly to get. So you can get good valuations and you can certainly get appropriate fees for that kind of work. I don’t think the SPAC phenomenon is going to continue indefinitely that that’s been my view all along and see a little bit of that kind of signaling that in the market right now. But I do think it’s got a ways further to go. I feel like we have all the capability we need to do a lot of business in that area, but we are also not acting is that this is going to be sort of a long-term trend the way other types of public company M&A. Our financial sponsor activity are just kind of the -- it’s just kind of a phenomena that’s happening right now for sort of the last year perhaps or the next year maybe two. But I think probably goes back to a more normal level at some point.

[Michael Brown:]

Okay. Great. I appreciate the perspectives on that. And maybe just two quick ones on expenses, so you had mentioned -- you made reference to some episodic items in the non-comp line this quarter. Can you just quantify those, just so we understand where they are and make sure we get the right jumping off points here?

[Scott Bok:]

I would -- it’s not like it’s extraordinary. But we had -- every year there’s just minor sort of foreign currency things. And last year’s first quarter they were a positive and this year they were a negative. So the net is somewhat meaningful, but there’s always some one-offs each quarter and we are within our target and I continue to think that there -- we try to be conservative in setting that target. So I’d like to think we can do even a little better than that in the non-comp side. So we are very happy with the way costs are playing out. And there’s an amount that’s meaningful enough that it’s worth mentioning in our press release and our 10-Q, but it’s not so extraordinary that I would sort of change my outlook as to the future run rate of costs.

[Michael Brown:]

Okay. And then on comp expense, the comp dollar expense that I heard your commentary about the operating margin and that seems to be the right way to think about the business, but if you think about kind of the near-term comp dollars, which came down nicely year-over-year in the first quarter. Any color on how that trajectory or cadence could be for this year? It just sounds like you are expecting a pretty active hiring environment and I am just trying to square those things with how the comp dollars could play out for the year?

[Scott Bok:]

I think we really aim for a comp ratio on an annual basis and we have done a reasonable job of getting there, not always at the beginning of the year, but we normally get there. I think we expect to do a lot of recruiting this year, but I wouldn’t expect to do so much that it would have a dramatic impact on the comp ratio. So, I think, we can continue to work on getting our comp ratio targets, and at the same time, make some significant hires on at least two parts of our business without taking away from that goal.

[Michael Brown:]

Okay. That’s helpful. Thank you for taking my questions.

[Scott Bok:]

Okay. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Scott L. Bok for any closing remarks.

[Scott Bok:]

Okay. I will just say thank you everybody and we look forward to speaking again next quarter.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.