Greenhill & Co., Inc.
Q2 2020 Earnings Call Transcript

Published: 23 Jul 2020

[Operator:]

Good day, and welcome to the Greenhill Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Patrick Suehnholz. Please go ahead.

[Patrick Suehnholz:]

Thank you. Good afternoon and thank you all for joining us today for Greenhill’s second 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 second quarter revenue of $47.8 million and a loss per share of $0.79. For the year-to-date, we had revenue of $114.9 million and a loss per share of $1.19. Revenue for the year-to-date was 7% higher than our figure from last year when we had a weak first half that was followed by a strong second half. We came into this year expecting the positive momentum from last year's second half to continue, but the pandemic and resulting economic downturn put a pause on that. Despite that pause based on the timing of various M&A and restructuring assignments, we expect to see sequential revenue improvement in the current quarter and a particularly strong fourth quarter resulting in a respectable revenue outcome for the full year. Before I go into more detail on our results and outlook, I want to provide an update on our operations during this pandemic period. Consistent with what I said on our last call, we have continued to function well operationally, maintain close client relationships, build new relationships and provide the same high-quality advice we've always offered. While a majority of our people are still working remotely, our global team remains connected engaged and highly motivated with a remarkably high level of morale at all levels despite the many personal and business challenges created by the pandemic. In recent weeks most of our offices around the world, including the New York headquarters where I am right now have reopened and people have started to return. But regardless of how long it takes to get everyone back into our office, we are well-positioned to continue to serve clients in the interim as they navigate the complex challenges created by the pandemic. In fact during the second quarter we were able to win and execute certain restructuring and even M&A transactions for clients without ever having met them in person. Now I will provide some more detail on our results and our outlook. In the first half we saw a significant increase in revenue from our recently enlarged and still growing restructuring advisory business. We historically had a very small but high-quality restructuring team until we decided two years ago to embark on a major expansion. While it is difficult to provide quantitative data on this business given its close interrelationship with the M&A business, it's fair to say that our dedicated restructuring team is now multiple times bigger than it was previously and our capacity is further expanded by the involvement of numerous industry sector and M&A-focused bankers. Consistent with the growth in the team, our restructuring-related revenue for this year will likewise be multiple times greater than it was last year. Monthly restructuring retainer fees are at all-time high levels, and as completion fees follow in the second half, we expect this business to be a very important contributor to our total revenue for this year. To give you some granular sense of the pace of activity and progress on major assignments we are seeing, in the past three to four weeks we've advised on four significant pre-arranged bankruptcy filings for Cirque du Soleil; for fast food restaurant owner, NPC; for Global Eagle Entertainment, which is reported in today's Wall Street Journal; and for Ascena, the owner of retailer Ann Taylor, which was reported earlier today in the Wall Street Journal. We are a debtor adviser which is typically seen as the largest role on all, but Athena where we are representing creditors. Beyond what we foresee this year we expect this restructuring cycle to run for multiple years as the impacts of the pandemic propagate and evolve. And already, we have won assignments where we expect completion will come next year rather than this one. Offsetting the increase in restructuring revenue in the first half was the fact that industry-wide M&A activity fell to the lowest levels of the financial crisis and the capital advisory transaction volumes fell similarly. However, we are optimistic about improvement in both areas going forward. M&A volume as a percentage of total stock market capitalization, a measure analysts and investors have historically used to monitor the M&A cycle is at the lowest level since that figure started getting measured in the 1980s. In addition, in our firm, we've actually seen an increase in new assignment activity for M&A in the first half compared to last year. The challenge is simply that many transaction processes are either paused or are progressing slowly given uncertainty created by the pandemic. Likewise on the capital advisory side, transaction volume was far below its level of last year. With institutional investment portfolio managers, continuing to grow their private equity allocations and specialized funds focused on the secondary private equity market also continuing to grow, there is good reason to expect that secondary market capital advisory activity will return to pre-pandemic levels and grow from there once visibility as to the virus and the economy improves to some extent. By region, the U.S. will be a major contributor to our full year results given that is where the bulk of our restructuring activity is located. Europe has a much smaller restructuring opportunity than the U.S., but made a major contribution to our first half revenue and should for the full year based on increased M&A activity there. In Australia, Canada and Japan, we're seeing reasonable levels of activity and we expect respectable contributions to our full year. As noted in our earnings release, during the third quarter we exited Brazil by selling our business there to the local team for a nominal sum. We had a good group of bankers in Brazil, but we did not find the kind of larger cross-border opportunities we found in other markets. As a result, particularly given the weakness of the Brazilian currency we generated modest dollar revenue and proved unable to generate a return on our investment in that market. Accordingly, we expect this move to be modestly accretive to our productivity and profitability statistics going forward. The update on Brazil is a good segue to speaking about expenses. We are taking a number of steps to reduce our operating costs, where possible while continuing to invest in the long-term potential of our business. With respect to personnel, we expect to end this year with about the same head count we started the year. But within that number there will be some reallocating of headcount to areas we believe have greater potential. For example, continuing to build up our restructuring team and certain sector-focused teams, while exiting Brazil and losing the dozen or so employees we had there. Our compensation costs for the first half were up about 10% compared to last year, given some headcount growth we had since the prior period, and our compensation ratio was elevated by the low level of revenue. As we did last year, we will aim to bring that ratio down considerably by year-end. Our non-compensation costs for the first half were meaningfully lower than last year's level, despite some non-recurring costs related to our exit from Brazil, and to our expensing rent on two New York offices, while we build out new space that we will move into later this year. For next year and beyond, our rental costs in New York will be lower than recent levels, so this brief overlapping cost is a good investment. In other costs, our interest expense has continued to decline versus last year, as a result of last year's refinancing and recent declines in interest rates. And our tax rate is not terribly meaningful, given the unusual first half loss. As noted in our press release, based on our outlook for both revenue and expenses in the second half, our objective and expectation is to generate a net profit for the full year. In terms of capital return and liquidity, we declared our usual quarterly dividend, but we have continued the pause on share repurchases that we implemented when the pandemic began. We ended the quarter with $84.6 million of cash and have only $3.1 million in remaining principal repayments scheduled this year. Given our expectation of a strong finish to the year, we aim to be making incremental debt paydowns by early next year. Now, I'm happy to take any questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Devin Ryan from JMP Securities. Please go ahead.

[Devin Ryan:]

Hey, Scott, how are you?

[Scott Bok:]

Good. How are you, Devin?

[Devin Ryan:]

I’m doing well. So, appreciate the commentary on kind of the outlook in, I guess, the next several quarters, have some line of sight into. I'm just curious, as you're thinking about the fourth quarter, obviously, still a little ways away, kind of, the expectation of a pretty strong result. Is that based on activity that's already been announced? And so, you have some pretty good visibility into just timing of completions? And how much of that, kind of, expectation is activity that hopefully will come together, but maybe is less certain, because the deal hasn't actually been announced?

[Scott Bok:]

I would say, a very high portion of that is kind of announced in one way or another, or at least signed, if it's not publicly announced. So there are very smaller things that we expect will still both get signed and completed this year, but, obviously, we're already in July, so there's not a huge amount of that. So, I'd say, we have pretty good visibility, as we often do, for sort of four or five months out. Obviously, it's always foggier when you get to a year out. But for this kind of time frame, you can look at what's already well underway and have a pretty good view, usually, as to when things will close.

[Devin Ryan:]

Got it. Okay. Thanks. And then in terms of just the M&A markets more broadly and the outlook there, we're kind of in this unique moment where there's just extreme uncertainty and whether the virus creates another shutdown. And so, I think, there's kind of concern there. On the other hand, Europe feels maybe slightly better in terms of their positioning with the virus. I'm curious, are you seeing, kind of, M&A activity track kind of the reopening? Meaning, is Europe may be coming together faster than the U.S., just because there's maybe the ability to meet more in person? Or how are you thinking about, I guess, the markets from geography? And then, how important is, obviously, the reopening to the ability to restart the M&A engine?

[Scott Bok:]

Yes. Look, I don't see a lot of difference across the regions. I do feel like that activity and sort of momentum in the M&A market has ticked up in recent weeks. I don't think people are going to be meeting face-to-face with the clients very often for probably a good while yet. So I don't think that's a factor Europe versus the U.S. so I think there's still going to be probably pretty minimal face-to-face meetings and more by phone and e-mail and all the rest. So I have -- I feel like I've seen some uptick in activity in recent weeks. I mean what I really am banking on, more than anything is that I can't predict how long the sort of the unusual period we're living through from a health perspective is going to last. But I do know that literally the only time in my career when M&A volume was as weak as it is right now was really 2009. That was by far the worst year the financial crisis. The next year there was a 50% increase in M&A activity. And that stayed at least at that level for the next 10 years. You can go back to like literally the year, I joined this firm 1997. The statistics were quite similar to what they're on track for this year, and think how many fewer firms were even in this business, back in 1997. So I think there's just a tremendous kind of pent-up demand that one normally sees when there's a big shutdown like there was in 2009 or like there is. And that statistic, I alluded to in my talk about M&A, as a percent of total stock market cap, I mean that literally has ranged from all the way back to the 1980s from between 5% and 15%, sometimes a little bit higher percent of total market cap and it's below 3% right now. I mean it's never been below 5%. So I think whenever things do kind of get back to normal. And I think they're starting now, I think that we're going to go back to what's been the norm for the last decades for M&A activity.

[Devin Ryan:]

Yeah. I appreciate that. And we look at those stats as well. I guess the last question on, the restructuring business. You're benefiting from growing your overall franchise as you've added a number of heads as you mentioned, but also just the pretty substantial uptick in industry activity. When you think about kind of the momentum this year in terms of impact on revenues, you have a good nice step-up this year from last year. But just given the nature of the deals and the length of time from announcement or start to completion, it would seem that there's quite a bit, that's been announced recently that could be more of a 2021 revenue event. I mean is the expectation at this point that 2021 could see kind of another step function, higher in revenue just based on your views of the market for restructuring remaining active for a few years?

[Scott Bok:]

Yeah. I mean, I actually -- I'm quite optimistic about what's even going to fall in 2020 just based on the status of various things that are pending out there. But I think wherever we end up I would expect 2021 for us and probably for the whole advisory industry, to be as good if not better than 2020 in terms of restructuring revenue. For just the reason you point out these things do have a long timeframe usually. But I won't say always. I mean sometimes you can quickly get to kind of a pre-arranged deal everybody has agreed. And yes you've got to still put it through court. But things can move pretty quickly there. But a lot of deals of course do have a longer tail to them. And so, I think 2021 and frankly probably 2022, I mean this is going to be a real kind of bifurcated impact on the economy. There are many industries of course almost completely unscathed maybe even better off as a result of the crisis. And there are others like retailing and energy. And some aspects of industrials that are anything to do with transportation, leisure, et cetera that companies have really been hammered by this. And they're not all in bankruptcy yet, but there will come in time as maturities come closer that more and more are going to need to do some kind of a restructuring in an out of court.

[Devin Ryan:]

Okay, I leave it there. Thanks. Appreciate it.

[Scott Bok:]

All right. Thank you.

[Operator:]

Thank you. Your next question comes from Michael Brown from KBW. Please go ahead.

[Michael Brown:]

Hi Scott. Good evening.

[Scott Bok:]

Hello.

[Michael Brown:]

So if I go back to your fourth quarter earnings call, one of the things you pointed to was the strength in the Brazilian franchise and you had noted that they had their best year ever in 2019. So here what you're kind of saying about their reason to sell. But I wanted to just learn more -- a little more about that. Is it just that the environment has shifted so significantly since then? You really weren't seeing an opportunity to -- for that franchise to be profitable going forward? It just seems like a major shift in a rather short period so just wanted to hear more about that.

[Scott Bok:]

Well we really had one good year out of the seven that we were there in a financial sense. And that was -- last year was reasonably good. Again not material to the firm at all, but at least it had good momentum. I mean as you know if you followed it all, I mean Brazil has had a series of sort of political and economic crises. And so notwithstanding as I said a very high-quality team we really struggled to make much money down there make really any on a longer-term basis. And with the virus -- the onset of the virus, I think the potential to continue that momentum into this year I think that any hopes of that sort have pretty quickly went away. I think life might have been quite different had the virus not hit. But whatever impact we're feeling in places like New York and London, it's going to be a multiple of that down there. So we are -- I think that what we're doing is absolutely the right thing in terms of the productivity and profitability of our firm but -- and won't certainly have any kind of material impact on revenue. But also, I think it's good for the team to be independent and let them have their kind of domestically oriented business down there and we wish them all the best.

[Michael Brown:]

Okay. Got it. And just wanted to go back to your comment earlier. So it looks like for year-to-date you've lost about $22.5 million and it sounds like you are expecting or your goal is to turn a profit for the full year. That would be really well above what the consensus estimates are predicting. Given what we're seeing in kind of the industry announcement trends that does seem like a pretty tough hill to climb. So could you just help us understand that a little bit better? I know you mentioned it's kind of revenue and expenses both contributing there. Can you give us a little bit more color on what's the really key revenue drivers? Is it that you're seeing a pickup in kind of the retail restructuring environment? That seems to be a little bit -- maybe quicker closing time so that restructuring is going to come through a little bit sooner? Or is it that, you're going to be able to pull down on the comp cost a little bit more in the second half or non-comp a little bit more? So just a little bit of commentary there would be helpful for us to kind of square that with what the expectations are out there.

[Scott Bok:]

Sure. First obviously we're going to do what's prudent on expenses. But really I'm talking about revenue as being the driver to get to where we think we're going to get for this year. And notwithstanding the fairly dreadful market-wide statistics on M&A we're a sized firm where it all just depends entirely in our individual pipeline. I mean -- and so, I'm looking at specific M&A transactions, specific restructuring transactions what the progress to those is, which ones we think will close on a probability-weighted basis. And that gets us to an outlook that yes, I will agree with you is quite different from what the consensus is. I think, probably to a significant degree people have still not appreciated how large our restructuring business has become and frankly they're probably missing to some degree some of the potential, we've got in the pipeline from M&A as well. But probably the biggest factor is I think, people haven't quite taken on board that we for the first time are a significant player in restructuring.

[Michael Brown:]

Great. Great. And then just one more here. Any outlook or commentary on your expectations for the Cogent business as we think about the second half here?

[Scott Bok:]

I would say in my outlook for the firm for the year, I'm not building in some huge bounce back in the second half for that group. But I do think that either late this year or early next year, there will be a significant pick up there. I mean that's been a remarkably steady business over the years. But whenever you have a real dislocation like we did in the first quarter you can naturally see why investors think well I want to see the first quarter marks before I transact. And then of course, by time those came out you had this huge rebound. So I think it's natural for investors to say, I want to see the second quarter marks before I consider transacting. So I think sometime later this year certainly, next year I would expect that business to rebound more towards its historic norms, but that's -- but I'm not kind of relying on that in terms of the outlook that I've described today.

[Michael Brown:]

Interesting. Thank you, Scott.

[Scott Bok:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from Richard Ramsden from Goldman Sachs. Please go ahead.

[James Yaro:]

Hey, Scott. It's James Yaro filling in for Richard Ramsden. Thanks a lot for taking the time. The first one for me is just -- if you could maybe talk about the geographic skew of the deals you're seeing across the M&A business and perhaps also the sort of size skew of those deals? Just trying to get a sense of what part of the business is improving for you if you can comment on that one.

[Scott Bok:]

You know, I think it's -- probably Europe is maybe the biggest positive surprise this year. Obviously, they've been hit by the pandemic as well so that's had a negative impact. But we've seen a pretty good level of activity there and I think even increasing in recent weeks. So I think whereas last year was a year when our European revenue was very soft now that was on the heels of an extraordinary year they had the year before. As we had hoped and expected, I think, this year we'll see -- a very substantial rebound in the European contribution. In the U.S. it just depends an awful lot by sector. Sector is way more important than geography. And if it's consumer, if it's health care, if it's industrial, if it's financial services of some kind things are quite healthy. If it's energy, if it's retailing and some other sectors it's much more of a restructuring business right now. So that's kind of how we see the different sources of revenue.

[James Yaro:]

Makes sense. Maybe we could dig a little bit deeper into the European business. So obviously, that's a jurisdiction that didn't really participate in the pickup in M&A over the last cycle. So I guess, how would you think about the ability for activity there to recover to levels seen maybe two cycles ago? And is there some, sort of, pent-up demand because of the lack of a pickup in activity there over the last decade?

[Scott Bok:]

Well, look, certainly that's my hope, and it's always been my expectation that at some point we would get back there. You are absolutely right that if you go back to pre-financial crisis, the European M&A market was essentially the same size as the American M&A market. And for the last 10 years, Europe would need to be sort of 50% bigger just in round terms to get to the U.S. level. So, it never really recovered from the financial crisis like U.S. activity did, and I think there are good reasons for that. Obviously, Europe was less aggressive in sort of combating the impact of the financial crisis, less aggressive about re-equitizing financial institutions and things like that. I think the -- just when you thought maybe we might be getting back to normal, you had the surprise Brexit vote. Then that took sort of three years to sort of sort out what that exactly meant. I realize there's still uncertainty there to some degree. So I think it was a little bit -- for M&A in Europe, I mean it wasn't like there was no success. But it was -- compared to the decade before, it was very anemic. And I think now with Brexit pretty much resolved with the U.K. having a pretty strong conservative pro-business government in place -- and the U.K. is, of course sort of a very important piece of the European M&A market. Historically, I'm hopeful that Europe will come back to its historic place of being closer to the U.S. market in terms of deal -- of market size for mergers.

[James Yaro:]

Okay. That makes sense. And then the last one is more of a modeling one. Just trying to get a sense of what the minimum level of quarterly comp expense that we should be expecting going forward? So I guess, sort of asking what the fixed comp expense is in the business right now. Just trying to figure out how to get to your commentary around positive profitability for the full year.

[Scott Bok:]

I think if you look at what we booked this quarter, I think that's probably -- it's not all fixed, but on the other hand, there are some levels at which bonuses are quasi-fixed as well. So, I think that what we've done this quarter is probably a reasonable estimate of what kind of the low end of what one can accrue and still be competitive and so on, on an annualized basis.

[James Yaro:]

All right. That’s super helpful. Thanks a lot.

[Scott Bok:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from Jeff Harte from Piper Sandler. Please go ahead.

[Jeff Harte:]

Good afternoon, Scott.

[Scott Bok:]

Hey, Jeff.

[Jeff Harte:]

A couple more from me. When we look at the more constructive revenue outlook for the second half of this year, how important are restructuring revenues in that outlook relative to other parts of your business?

[Scott Bok:]

It's certainly very important. I mean as I said, we've grown this business a lot. And even coming into this year pre-pandemic, it was going to be a much more significant contributor than it has been for us historically. Obviously, the pandemic really speeded that long, so now we've got retainers at much higher levels, and we've got a pipeline of completion fees that will fall at various points going forward. So yeah, that's a -- I mean again, it's hard to quantify for the reason I mentioned in my script, but it's going to be certainly significant.

[Jeff Harte:]

With that, I'm assuming -- because the restructuring is kind of where we have the least bit of visibility, I'm assuming that assumes some transaction closings as well.

[Scott Bok:]

Yeah. And that's -- exactly, and that's why I tried to give a little bit of granular detail. It's hard to -- it's hard to kind of quantify a number. We don't want to get in a sort of segment reporting or something like that. It doesn't make sense given the overlaps of the various businesses. But yes, not every restructuring is going to take a year to close. This is an environment where I think as much as ever where parties should want to have a quick resolution and get back out with a restructured balance sheet. So, I think, there's probably the prospect that some reasonable number of things move more quickly.

[Jeff Harte:]

Okay. And on -- we've been hearing a lot and it sounds like you're saying it too that the level of conversations in the M&A business is actually still pretty strong or pretty good. How important are face-to-face meetings and face-to-face for like due diligence for actually getting transactions announced? I mean, how much do we have to have transportation kind of wide open again before we can really see a pickup in announcement going forward?

[Scott Bok:]

We've seen cases, I mean, literally have done M&A deals without people even meeting, which seemed really extraordinary, but it is true and people are getting creative. And where they need to have meetings, maybe have smaller meetings with all the right kind of health protocols and things like that. So I don't think you at all need to have the airlines restore service everywhere and people like me who is spending three days a week in an airport for the M&A business to come back. I think every company has adapted to a virtual world. Now, obviously, there's some kinds of situations you're going to need to sort of see a plant or something, but most -- as you well know most kind of due diligence information is in data form. It might be a lot of numbers about historical or projected results. It might be patents, it might be trademarks, it might be copyrights, it might be formulas, it can be all kinds of different things. And frankly, you can do an awful lot of it not together. There was a day back when I was a lawyer one million years ago, contracts were always negotiated face-to-face, a big team of lawyers on each side of a long table and you'd kind of hash it out. Now many, many M&A deals happen without the lawyers even meeting. They just zing the drafts back and forth. And so I think M&A has kind of taken a step in that direction. That's not to say that it won't for a lot of important deals require people getting back together again. But you should just keep in mind that there are a lot of companies out there that already know their target. They've had talks over the years. They know the management team, et cetera, and that kind of lowers the bar a little bit in terms of how much face-to-face they need.

[Jeff Harte:]

Okay. And as we're thinking about non-comp and kind of where that kind of heads, I mean, there's something close to the kind of $15 million quarterly run rate a decent way to think about things in the back half of the year, because there were some kind of non-recurring items in this quarter.

[Scott Bok:]

Yes. Yes, I think that's a reasonable way to look at it.

[Jeff Harte:]

Okay. Thank you.

[Scott Bok:]

Okay. Thanks very much. And I think that's our last question. So I thank everybody for listening in. And stay healthy and we'll talk to you again next quarter.