Greenhill & Co., Inc.
Q1 2020 Earnings Call Transcript

Published: 3 May 2020

[Operator:]

Good day, and welcome to the Greenhill First Quarter’s Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I’d now like to turn the conference over to Patrick Suehnholz, Director of Investor Relations. Please go ahead, sir.

[Patrick Suehnholz:]

Thank you. Good afternoon and thank you all for joining us today for Greenhill’s first quarter 2020 financial results conference call. I’m Patrick Suehnholz, Greenhill’s Head of Investor Relations. Joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.Today’s call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm’s control and are subject to known and unknown risks, uncertainties and assumptions. The firm’s actual results and financial condition may differ, possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm’s future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made.I would now like to turn the call over to Scott Bok.

[Scott Bok:]

Thank you, Patrick. We reported first quarter revenue of $67.1 million, an operating loss of $2.7 million and a loss per share of $0.40. The revenue figure was 31% higher than last year’s figure, but significantly lower than what our outlook indicated a quarter ago. The negative earnings per share figure was exacerbated by two factors

[Operator:]

Thank you. [Operator Instructions] Today’s first question comes from Devin Ryan at JMP Securities. Please go ahead.

[Devin Ryan:]

Great. Good afternoon, Scott and Patrick, I guess first question just on the advanced payments on the term loan facility. I guess what drove that? Why do that with the cash here? Just any thoughts around the driver of that would be helpful.

[Scott Bok:]

Well, we did that first of all before all the virus publicity and then the impact on the economy and so on. And we did it for the very simple reason that we just felt we had excess cash. And so why leave cash sitting on our balance sheet earning effectively no interest versus just giving it to the lenders a bit early and saving the interest expense on that. So it was really nothing other than a sort of an interest rate arbitrage and just kind of a bit of a prepayment related to that. There’s really not much more to it than that.

[Devin Ryan:]

Got it. Okay, that’s helpful. And then with respect to some of the new business that you are winning, I mean I’m assuming that probably the conversations with clients have shifted, I mean so maybe the types of deals are changing. Is that fair or is this really just kind of a continuation of conversations and just year-in [ph] sectors or where deals are getting announced in sectors that maybe have been less effective? I’m just trying to think about some of the acceleration in certain areas that you’ve noted and what’s driving that?

[Scott Bok:]

I would say that we felt like we had a lot of attractive early stage assignments coming into the COVID-19 crisis. And we don’t really feel like any of that’s going away. I mean things clearly have slowed down in a number of cases. But we don’t — we feel like that sort of inventory is still out there to be picked up as things stabilize. I think separate from that, we’ve had quite a lot of inquiry into kind of different types of transactions. Many are probably directly or indirectly driven by the crisis. Its companies looking at acquisition targets that suddenly are a lot cheaper than they used to be, there’s a feeling that maybe some targets are going to be interested given the kind of the healthcare and maybe being part of a bigger, stronger company, a better balance sheet.Clearly, large companies seem to be doing a bit better than small and midsize in the current crisis. So we think that’s going to drive a fair amount of M&A activity not in the next 30 days, but certainly over the next year or two as people come out of this crisis.

[Devin Ryan:]

Got it. And then just last one around the secondary advisory business, the old cogent business. So I’m assuming you probably saw some slowdown there in the near term just as you’re waiting for an update on private equity portfolio marks, maybe you need a quarter or two. I mean how does that business tend to shift when you have market dislocations, how quickly can it come back? And in some ways, that would - I actually think that there may be more to do now that there’s been maybe a little bit of dislocation that creates a desire for LPs to shift assets around or shift investments around and maybe more interest from buyers as well. So I’m just kind of curious how to think about the cadence of that business as the year progresses to the extent, we start to stabilize here a bit in the markets?

[Scott Bok:]

Sure. I mean every downturn, of course, is a little bit different. But I think you’re thinking about it the way we are. I mean, clearly important to remember that business mostly happens on the last day of a quarter. I mean people may agree things all quarter long, but when you actually close the transaction and the new limited partner buys and the old limited partner and it’s transferred on the general partners’ books in terms of who owns the stake and whatever private equity fund it is. That usually happens on the last day of the quarter. So if you have a big negative event that drives market values sharply lower, even if it’s more than halfway through an existing quarter, it can have quite an impact on how much activity actually closes that quarter end. And clearly, that’s what we saw this time.And I think things will be fairly quiet until new March 31 valuations and all those funds come out. Those usually come out, I would say maybe on average late, late May, some a bit earlier, some a bit later, but something like that. And we do feel like once that happens that there actually will be a lot of activity that will be catalyzed by the crisis itself. I mean if you look at - it’s been much publicized, the huge impact on university endowments and not just endowments, but whole universities, repaying room and board, struggling to make money in their hospitals when they kind of retooled to be ready for COVID-19. At certain schools, the cost of losing all your athletic audience revenue.So there are all kinds of reasons that universities think about other types of not-for-profit institutions that have been impacted. And then even just your general pension fund out there. I mean, the denominator the total asset pool has shrunk pretty dramatically over the last three months. And yet the private equity not just investments, but the commitments that they’ve made in regard to funds that they are limited partners in. Those are unchanged. Those commitments are still sitting there.So our sense is that a lot of big institutional investors are going to think that they’ve got either too much private equity or the wrong kind of private equity and people will want to reallocate those portfolios and we think there’s scope for potentially quite a lot of that in the second half of the year, which is why I made the comments I did about sort of first versus second half in that business.

[Devin Ryan:]

Okay. Terrific. All right. I’ll leave it there. Thank you, Scott. And I’ll hop back in the queue. Appreciated.

[Operator:]

And our next question today comes from Michael Brown at KBW. Please go ahead.

[Michael Brown:]

Scott and Patrick, yes, I wanted to just kind of parse through your commentary and the outlook a little bit. So appreciate the color on the restructuring environment. You mentioned that those revenues, it sounds like it will start to come through the completion aspect will start to come through in the next few quarters. And I mean that appears a little bit more optimistic, specifically to the timing than what we’ve heard from peers. It sounds like most are kind of talking more about a 12-month lag on those completion fees. So can you just help me square that? Is it that there are certain types of activity that will close more meaningfully sooner? Appreciate that. Thanks.

[Scott Bok:]

Sure. Certainly, I would agree. As I noted, that restructuring is going to have long timetables. And there’s obviously no one standard time table, but it can be six, nine, 12, 15, 18 months, in some cases. I think what’s different from us than most peers is that their business in 2019 was probably relatively flat versus 2018. I mean 2019 was not a big year of restructuring activity. However, for us, we had just stepped up in a really substantial way, the size of our restructuring team. And so 2019 was a year of significantly increased restructuring activity for us. And we entered 2020 with a substantially greater backlog than we had certainly a year prior to that and even more large compared to two or three years prior to that.So I think unlike peers, we sort of came into this year thinking we were going to see a substantial increase in restructuring revenue for things that we worked on over the course of last year. And we, of course had no idea COVID-19 was coming or that there was going to be a whole raft of additional restructuring projects that would ramp up pretty rapidly the retainer fees we’re seeing. So when I talk about sort of completion fees in the first half of this year in restructuring, those are things that relate to work that we mostly did last year.The things we’ve been hired on in the last five weeks some of those I would expect, will get to completion later this year and a fair number of the them undoubtedly will get to completion next year, which is why I think that even though we’ll have, I think substantial improvement in restructuring this year, I think next year 2021 will be even better just because probably from this point forward, sitting here on May, around May 1 almost every new piece of business we win, it’s probably going to be something that closes next year.So that’s the difference really. It’s that totally apart from COVID-19, we just had a very substantial increase in the size of our team and that led to a lot more business last year and now COVID-19 is just adding further to that.

[Michael Brown:]

Great. I appreciate the clarification there. So on the expectation for the second half to be stronger, any way to kind of parse through what kind of magnitude is it you’re expecting there? And kind of how the quarterly trajectory could kind of play out from here I understand that it’s very uncertain times. But just trying to understand, is it just a function of a very, very weak second quarter and kind of a return to more normal revenue environment in the second half? Or how should we think about it?

[Scott Bok:]

I mean, I see the first - I see just kind of the year really in two halves. And I didn’t say we expect a very, very, to quote you, weak second quarter. And I think I’ve given about as much guidance as really, I can give. But what I did try to do is say, for each of our three businesses, there are reasons to believe, and of course, there’s all kinds of uncertainty in the world. But there are reasons to believe today that each of the three should do materially better in the second half than the first half for three completely different reasons.One, is that on the M&A side, we have some large transactions working their way through the pipeline. Hopefully, those get done. Secondly, almost anything that develops in M&A as the market sort of reawakens in coming weeks or few months it’s clearly going to generate second half rather than first half revenue. So that’s the M&A business.On the capital advisory side, it’s really just as I answered to the question just before you, that the first half, you kind of hit an air pocket when people say, wait a minute, I don’t want to transact based on those net asset values that the private equity fund published, let’s wait for the March 31 data that will come in May. So my guess is at least that we’ll see quite a lot more of that in the second half.And restructuring is more of just kind of a big cyclical trend where our quarterly kind of retainer fees that we collect were quite a lot higher in Q1 than they were in Q4. We expect there’ll be quite a lot higher than that in Q2 and probably quite a lot higher than that in Q3 and then in Q4. So that’s building the on the retainer side, but then the completion fees will clearly start to kind of some of the more recent transactions will kick in later this year as well.So it’s hard to quantify all that of course, but just directionally in each of the three there’s a pretty good reason for thinking that the second half should look quite a lot different than the first half on the revenue side.

[Michael Brown:]

Okay. If I can just shift gears and get one more in here. On the comp ratio, it was elevated this quarter, and you kind of gave some color on that, but I wanted to get a little bit more information there. So it ran at 81% this year and above last year’s first quarter levels. I guess, last year it looked like you were essentially accruing assuming kind of an improvement throughout the year. How should we think about what the elevated comp ratio in comp dollars have implied for this first quarter? And I guess why run it so high in the first quarter if you expect it to come down throughout the year? Is there some contractual reasons behind that? And given kind of the challenging revenue environment, what gives you confidence that you’ll be able to really bring it down given the revenue environment? It could be very challenging from here.

[Scott Bok:]

Yes. Well, I mean just as a starting point, the comp ratio, look, it’s high no question, but it was higher last year’s first quarter. That was 88%. This quarter obviously was 81%. There’s a lot of factors that go into where compensation is, the amount of headcount you’ve grown, the people that you’ve brought on, any commitments you’ve made to particular individuals, your expectation of what you’re going to need to pay to be competitive and to continue to develop the business. So it’s hard to give too much more color on that. But look, I would look back to last year as at least one scenario, certainly the scenario we are aiming for.We ended the year with a very reasonable compensation ratio. I mean, I said it all year last year that that’s where we were going to aim for and where we hope to end up. And in fact, we did, at the end, end up very, very close to our target annual compensation ratio. So we’re going to try to do that again. And frankly, what gives me a fair degree of confidence that we can at least head in that direction is what I just said about sort of first half versus second half revenues.And again, it’s not just one of the businesses. It really feels like all three should be in a significantly different position in the second half than the first. And that ought to give us a fair amount of flexibility to bring that ratio down exactly like we did last year.

[Michael Brown:]

Got it. Thank you. Appreciate that.

[Operator:]

And today’s final question comes from Richard Ramsden of Goldman Sachs. Please go ahead.

[James Yaro:]

Hey. This is James Yaro filling in for Richard. The first one is, obviously you’ve seen a lot of strong growth in the restructuring business recently. Is there any way you could characterize the size of the business either today or perhaps before the Coronavirus began to affect the environment? Just so we can sort of understand the durability of total revenue, in particular in light of the decline in M&A revenue.

[Scott Bok:]

It’s probably hard to do that to be honest. I mean, look, it’s going to be a quite significant percentage of our total revenue in 2020. But I actually think it’s going to be for the long-term as well. As I said, we didn’t know COVID-19 was coming and all the terrible impact on capital markets and so many companies’ revenue and the impact on their balance sheets and so on. But we were already expecting a quite substantial percentage increase in restructuring revenue this year, and then it would grow in 2020 to become quite a significant part of the overall firm.Clearly, our view of 2020 revenue and further of 2021 revenue in that area is even greater, so I mean, I think let me put it this way, if it’s maybe of some help. A lot of the analysts will look at the various firms like ours and sort of try to quantify sometimes how much of the revenue was M&A and how much is non-M&A and other activities like restructuring. And I think historically, we were on the end of the spectrum that was very far over toward pure M&A. It’s not all we did, but certainly, we were very heavily weighted toward that.I think we have moved to the point where certainly, I would feel like we’re in the middle of that pack and maybe even given the capital advisory acquisition we did as well as the restructuring, maybe even moving toward the high end of our peer group in terms of how diversified we are relative to a pure M&A business. And that’s just directional. Obviously, it’s going to ebb and flow as times go to good times or bad.And clearly, we’re in a period where not for all companies by any means, but certainly in some sectors, there’s going to be a lot of challenges in dealing with balance sheets given the reduced revenue. And so I think for the next, I would think really even two-plus years we’re going to see restructuring be a really important part of our firm’s total revenue just like you’re going to see for some of our more diversified peers.

[James Yaro:]

Got it. That’s actually super helpful way of contextualizing it. Maybe you could talk about how your capital return priorities have changed in light of the weaker macro environment. And if this crisis goes on for a more prolonged period of time, are there any actions that you would potentially consider to protect your cash balances?

[Scott Bok:]

I don’t see the need for anything in particular. I mean, had you posited for me the scenario that we’re now in some months ago, what do you think life will be like, if all of your offices close and you can’t meet with clients and M&A activity plummets and so on. I mean, I probably would have had a pretty sober view of what the future might hold. But now that we’re sort of six or eight weeks into that, and I can see the flow of restructuring come in. I can see that M&A is not completely gone away by any stretch.There are old things that slowed down a little bit, but are still there, a lot of new things that are developing. Frankly, I’m not overly concerned about our ability to continue to operate even if things stay difficult longer than I think they will. So we took the prudent step, I think of saying, all right, let’s just put a pause on further share repurchases given that there is undoubtedly a lot of uncertainty right now.We can always come back to that later if it’s appropriate, but likely not for the very near term. And let’s do take a closer look at costs and things like that. And certainly, that’s something we have done some of and what we will do more of. And I think between that and sort of the diversified revenue stream, we’ve got, it certainly feels like we’re comfortable to get through this whole thing. And the kind of the switching from a share repurchase focus to a balance sheet strengthening focus is just one small step to further bolster our case in case things turn out to be more difficult than what I’m expecting right now.

[James Yaro:]

Understood. And then I guess related to that, how has the recruiting environment changed over the past few months? And now that you are seeing better activity and you feel like things are actually stronger than you might have expected if I had posited this to you a few months ago. Are there opportunities to hire senior bankers? Is that something that you’re looking into as well?

[Scott Bok:]

Yes. We actually are. We hired a couple of senior bankers full time type and then a couple of other senior advisors who are more part time roles. In the first quarter, we are actually in dialogue with some others. It’s a little different than normally. We’re talking by video and so on. I’ve actually been speaking to somebody else all morning so new candidates continue to materialize. And kind of old dialogues, in some cases, getting rekindled. So I don’t think this is going to be a huge recruiting year, but I do think we’ve added some really important talent and I think we’re going to add some more important talent certainly over the course of the rest of the year.

[James Yaro:]

Okay. Thanks a lot. All right.

[Operator:]

And our next question today comes from Dallas Hunt of LPL Financial. Please go ahead.

[Dallas Hunt:]

Guys, I really like the strategy you guys have of focusing on the advisory. I had a question about just wondering how you guys are - if you have specific goals on how much debt reduction you want to get this year.

[Scott Bok:]

I wouldn’t, as much as possible, is probably the short answer. But I wouldn’t want to try to quantify it. I mean really, our focus this year is just on having a reasonably good year in a really tough environment. And the way I look at it is if in the first half, which obviously is very severely impacted by COVID-19, if we can generate even in that tough six months enough revenue to run our business and if we can position ourselves during that period to hopefully have a much stronger second half after that, then I’m going to consider it a victory in what’s probably the biggest financial and business crisis certainly of my career.And we’ll see where we are at the end of the year. And obviously, we have our seasonal needs. They tend to be highest at the beginning of the year and then decline over the course of that year, and we’ll do what we can on further paying down debt over time. But the main focus is let’s just prove this business can perform even under some pretty extreme circumstances, and we feel like the first several weeks of these extreme circumstances is where we’ve been proving that.

[Dallas Hunt:]

Okay, thanks guys, that’s all I had.

[Scott Bok:]

Okay. Thanks everybody else for dialing in. I think that’s our last question and we look forward to speaking to you all again soon. Goodbye.