Greenhill & Co., Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good afternoon and welcome to the Greenhill & Co., Inc’s Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Please also note this event is being recorded. I would 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 fourth 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.

[Scott Bok:]

Thank you, Patrick. We reported fourth quarter revenue of $140.7 million, which was our best quarterly performance ever, an operating margin of 57% and net income of $2.71 per share. For the year, we had revenue of $311.7 million, an operating margin of 18% and net income of $1.36 per share. Our quarterly revenue was up 32% and earnings per share was up 158% from the same period last year. For the full year, our revenue was up 4% and earnings per share was up 202% from the prior year. In sum, we had a very strong finish to the year resulting in very respectable pandemic year results on the top and bottom line, all consistent with our commentary on the past couple of quarterly investor calls. Clearly, quarterly revenue of the scale, we achieved requires a lot of things to go right. We generated multiple very significant M&A completion fees, multiple very significant restructuring completion fees and a long list of smaller piece to go with them. We also benefited more than usual from accounting rules in relation to revenue recognition that came into a few years ago and sometimes require revenue from completion fees to be booked before the transaction triggering that fee is fully completed. But just to make clear that our very strong quarter was not simply a matter of transaction timing, our earnings per share for the quarter was greater than the analyst consensus forecast for the fourth quarter and the next four quarters ahead combined; in other words, our profit in one quarter exceeded what was expected for five quarters. Looking at our full-year results, we benefited from particularly strong results from our European M&A business and our U.S. restructuring business. We also benefited from an expanding array of financing advisory roles that are neither traditional M&A nor traditional restructuring. Our private capital advisory business made a meaningful contribution as well, albeit considerably less so than in the prior year. Our revenue for the year was highly concentrated in a few busy areas as many regions and sectors were heavily impacted by the pandemic and related constraints and economic activity, and thus produced only modest revenue. Importantly, we see nearly all of those areas is poised for significant improvement in 2021, given current market conditions and what we can see in our pipeline of assignments.

[Operator:]

Our first question comes from Devin Ryan with JMP securities. Please go ahead.

[Devin Ryan:]

Great. Good afternoon, Scott and Patrick, how are you?

[Scott Bok:]

Hey, doing very well. How about you?

[Devin Ryan:]

Great. Maybe to start obviously, a terrific quarter, I’d love to just get a little bit more perspective on kind of how the tone of business evolved and if you can give some perspective around that the various new businesses the Greenhill was in? and really, what I’m trying to just think about is the commentary around expectations for improved productivity. And I know it’s probably, hard to give you an exact target of where you guys would like to be on productivity, but if there’s anything you can share around how you think about whether it’s managing director productivity or employee productivity? Kind of what’s a range that you feel like is both achievable, but kind of reasonable for the business today.

[Scott Bok:]

Okay. There’s a lot in that question. A lot of elements to it and starting with 2020, was a year when people talk about cycles the last three years, I think we had cycles that lasted for months. I mean, essentially the first quarter, the first 10 weeks, maybe of the year, it seemed like it was going to be a good year in M&A, a good year in capital advisory, kind of a normal, the quiet year and restructuring. obviously, when the pandemic sort of shut things down in mid-March, you had a few months period, where certainly, things in the economy and the markets looked pretty grim. There was an explosion of restructuring opportunities. We won a tremendous amount of business. Obviously, many of our peers did as well. There were a lot of opportunities out there. M&A really slowed down. And capital advisory essentially stopped; because that’s very closely tied to markets and people didn’t want to transact when markets were moving around and frankly falling so dramatically. that changed in turn again, really very quickly, by the time, you got to the third and fourth quarter; suddenly M&A started coming back to life, especially in the sectors that were less impacted, consumer healthcare, technology, telecom infrastructure, things like that, stayed quiet of course, in some of the areas that are more impacted. Capital advisory came back to life actually had a decent fourth quarter for us and restructuring while there’s still plenty to sort of work through the pipeline and finish, the sort of the arising of new opportunities certainly, slowed a lot as we got to the later parts of the year. So, it really was kind of a year with kind of three completely different pieces to it.

[Devin Ryan:]

Yes. Thanks, Scott. appreciate all the color there. And then maybe, just one follow up here, some of the operating margin commentary and just trying to think about going from the 18% in 2020 to call it the mid-20s, or let’s just say 25%, you highlighted some of the kind of expense levers. And then clearly, the revenue assumption in there as well, but in a reasonable revenue environment, maybe say, a healthy revenue environment, where you have a full year of your healthy revenues, is that enough to get there or is that more of an aspirational, you’re kind of moving towards that you’re investing in the business and you feel like that’s is the firm scales and productivity improves that’s ultimately kind of where you get back. I’m just trying to think about, is that something that the business kind of gets to relatively quickly as some of these expense savings manifest and revenues, get back to something maybe, a little bit more normalized or are there other kind of factors in there as well?

[Scott Bok:]

I’d say, we’re – look, last year shifted so many times, one hates to make long-term predictions, but even for the full year ahead. But we’re more optimistic about getting back to the 25% margin. We had a for a lot of years, our history, not even that many years ago, we certainly need a certain level of revenue productivity to get there, but I do think the reduction in non-comp expense is kind of a game changer. And clearly, we’re getting a lot of savings right now with travel and entertainment, and other things like that. But we do think a lot of that is going to continue post-pandemic and some of the other savings, we’ve just done a lot of little things that add up to a fair amount and clearly, things like our New York headquarters, that’s a fairly meaningful number for us. So, I think the reduction in non-comp gives us increasing confidence that even with paying out a higher comp ratio than we did for many years of our history when we had very, very high margins. I mean, today, I think you have to have higher comp ratio to be competitive in terms of talent. But we think we’re getting closer to the point, where we can do both and get back toward those high margins of the past.

[Devin Ryan:]

Okay, terrific. Thank you so much, Scott. And I’ll hop back in the queue.

[Scott Bok:]

Thank you.

[Operator:]

The next question is from James Yaro with Goldman Sachs. Please go ahead.

[James Yaro:]

Hey, Scott. How are you doing?

[Scott Bok:]

Good. How are you?

[James Yaro:]

Doing well. So, I guess my first one is, I’m trying to tie together your point that restructuring business has cooled relative to 2020, but also the fact that you expect to be able to grow the business further in 2021. Maybe, you could help contextualize how you expect the full year 2021 restructuring revenue to sort of perform relative to 2020. And then as a corollary, maybe, you could just talk about whether you’re targeting more of the creditor side assignments or debtor side and maybe, the split across those, if you’re able to.

[Scott Bok:]

I think like most of our competitors, we do quite a mix these days of veteran creditor and also have kind of more plain vanilla financing along with more bankruptcy-oriented type stuff. I mean, clearly I think like most of our peers are now saying as well, there’s going to be less bankruptcy activity, real near-term. but there’s still a fair amount working its way through the pipeline. So that’s going to happen. We think there will be, in today’s very robust financing environment, more kind of alternative capital source financing transactions that we can get involved in. But my comment about really getting bigger and restructuring is more of a medium-term comment. I mean, conceivably, we’ll grow the team further this year. but certainly, I think over time we will – we – this was really a landmark year for us in 2020. We’ve always had a restructuring team, very high quality, but not very big. And we took a big step-up in terms of size. And I think now, 2020, it was great to add a lot of really high margin revenue in restructuring transactions. But I think equally important; we added a lot of great credentials. So now, in almost any relevant sector, we have far more credentials than we once did. I think we’re much more in the game, much more in the flow. And yet, we’re not at the very top tier of restructuring advisors in any sort of lead table sense. So, I think there is potential to grow further there. whether we actually see revenue growth in 2021, I’d probably say that 2021 feels to me right now like it’s much more of an M&A-oriented environment than restructuring. So, if you ask which business I’m sort of most optimistic on in terms of growth, it would certainly be M&A just given high stock prices, low borrowing costs, et cetera. But we feel pretty good about both actually.

[James Yaro:]

Okay. And then just thinking about the capital advisory business, I think some peers have talked about that being an area of strength heading into 2021 as well. Maybe, you could help us think about that one relative to in that matrix of restructuring versus M&A, is it sort of in between those two or closer to one versus the other?

[Scott Bok:]

I think that business is probably more restructuring sized, maybe, even a little smaller than that today, but we’re in the process of building that up. So, I think, we – we’d like to see capital advisory probably, be more in line with restructuring in terms of sort of size of the business. I mean, restructuring is going to be much more volatile. You have some real booms and busts, of course, whereas capital advisory should be probably a little bit steadier. But we do think there’s quite a lot of potential in that business. We’ve got good pipelines in Europe and Asia. We’ve got some expansion ideas in the U.S. to rebuild the team and really focus on higher value-added transactions, more work for private equity sponsors, as opposed to just the limited partner sale transactions from one institutional investor to another, that’s good business too and we want to do that. but it’s not as complex large or high margin as the general partner restructuring-oriented transactions. So that’s how we – we’re excited about that business as well. But again, I’d highlight, I think what really looks like it’s in an extraordinary environment is the M&A business and we’re going to really focus on taking a lot of advantage of that while we continue to build out restructuring and capital advisory.

[James Yaro:]

Got it. And then the last one is just maybe, you could touch on the hiring environment at this point for senior bankers and how it compares to maybe, three to six months ago. And then what are your aspirations for growing that business? I know a few years ago, you did sort of target a growth rate for the MDs over the course of a year, but maybe, you could update us on how you’re thinking about that?

[Scott Bok:]

Yes. I’d still like to aim and obviously, a pandemics appeal your year, but I think a part in the more normal years. I’d still like to see sort of 10% Managing Director headcount growth. Right now, I would say, it’s a pretty interesting environment for recruiting. as it seems, that always is the case on Wall Street, there is a fair amount of movement around. we’re having people reach out to us. We’re having headhunters reach out to us. We’re having deal – dialogues that we’re initiating and in quite a few different areas around the world. And I’d say particularly, in the U.S. with and a particularly, probably more M&A-oriented people, although clearly capital advisory as well and some selected on international opportunities as well. So, I’m pretty optimistic this will be a significant MD recruiting year for us.

[James Yaro:]

Okay. Thanks a lot and congrats on the record quarter.

[Scott Bok:]

Thanks.

[Operator:]

The last question comes from Michael Brown with KBW. Please go ahead.

[Michael Brown:]

Great. Thanks. Hey Scott, how are you?

[Scott Bok:]

I’m very well. How about you?

[Michael Brown:]

Doing well. Yes. So, I thought I would start with the fourth quarter and just wanted to kind of parse out the revenues there. Could you just share how much of the revenues were associated with deals that were pre-COVID versus transactions that were a part of kind of the M&A recovery that started in the summertime? And then the second part of that question is what proportion of the revenues were from restructuring or kind of liability management-related transactions?

[Scott Bok:]

Okay. A few different questions there, I would say a lot, our revenue in the fourth quarter was a mix of really two things. It was, I mean, there certainly, were M&A transactions that arose and had very short kind of timelines and got done very quickly. But I would say a lot of the revenue was from M&A transactions that were certainly well in process before the pandemic. And then from restructuring assignments that were new to us in sort of March, April, May, when there was the big rush of opportunity. We have seen a significant pickup in M&A dialogue, I would say, starting in the fall, and then ramping up through the winter, but a lot of those, of course, haven’t even reached the announcement stage yet. Some of those will get announced and then close very quickly. Others will, have a little bit longer timeframe to close, but I think that’s a good way to describe – fourth quarter of 2020s revenue, as far as how much of our revenue is sort of restructuring related. If you said, it’s putting aside what teams worked on and what parts of the firm and all that, but what really related to sort of a bankruptcy or a bankruptcy type, or maybe, a financing advisory debt financing advisory type role. I would say it was about probably, a third of our revenue for the year. I’ve not typically quantified that all that much, but look, this was a big year in that space. So, it’s worth highlighting. I don’t think most investors have seen us as a firm that has that kind of scale to our restructuring business. So clearly, it’s grown a lot over the last couple of years as we’ve invested in. I’d say, in rough terms, it’s very hard of course, to parse out in, at the margin, what is a kind of an M&A transaction versus a restructuring transaction in many cases, but I’d say if you said roughly, a third of our revenue in 2020 came from something related to debt restructuring. That would be a fair estimate.

[Michael Brown:]

Yes. I appreciate the candor there. I know it’s always challenging to split that out. And then a follow up there, you had talked about some of the accounting nuance from the revenue recognition rule changes from a couple of years ago, and it sounded like that had more outsize impact this quarter. Can you quantify that and was that associated with kind of one transaction or was it a few deals? I’m just trying to make sure that we think about this correctly, when we look at the public data and what’s on your website, when we think about 2021?

[Scott Bok:]

Sure. We’ve never really quantified that kind of issue. So, I hesitate to do that now, but I’ll say this. Look, I think, I mean, this change, which we had nothing to do with, of course, no one else in our industry does as well, it just sort of was handed to us occurred a number of years ago, so everything’s apples to apples. Now, we had the same thing in the fourth quarter of the prior year, and we do in every quarter, you have just like, we have some you’ll know that reimbursed expenses didn’t use to count as an offset against costs. Now, it costs as a piece of revenue and our count is a piece of revenue and that that’s a piece that was missing in 2020, obviously, because there weren’t many expenses to get reimbursed. And then likewise, there’s some nuances in terms of how revenue gets booked on completed transactions and also some deferral really of revenue on certain kinds of retainers, where you have to wait until there’s kind of a completed transaction to book retainers, even if you’ve been paid on them. So, there’s pluses and minuses in every given quarter, the pluses were a little higher this time around. So, I wanted to make that clear to people just so there’s no confusion that it was a more material thing. But again, that’s why I wanted to highlight also that this is not some sort of pulling a little revenue out of one quarter and putting in another, I mean, the EPS was more than one analyst were forecasting for five quarters. And as you’ve heard, we’re pretty excited about what 2021 can bring as well. So, we’re hopeful for to build on 2020s results rather than see 2020 is something that’s been diminished by the way 2020 ended for us.

[Michael Brown:]

Okay. And it just said kind of segue to maybe, one more question for me. I saw that you guys closed a large lucrative transaction earlier this week. And then when I can see from your public pipeline is that it kind of depleted a lot of the expected revenues that we can see obviously, every day changes. But you’ve certainly made some very constructive or bullish comments about the M&A outlook. And so what I was hoping is could you just share maybe, a little more color about what you are seeing in the non-public pipeline for Greenhill specifically, just to give us a glimpse of what could be coming in the near term as we think about the first quarter, and then maybe, the second quarter here. And then if you think about the cadence of revenues in 2021. You expected to be kind of a normal year, where you kind of built into the second half of the year and the fourth quarter typically being the seasonally strongest? Thanks.

[Scott Bok:]

Okay. Again, a number of things tucked into that one. I see 2021, if I had to guess today is looking more normal than the last two years, the last two years, for whatever reason, we had a very strong finish to the year, and it sort of got us to a good outcome in the fourth quarter was really a lopsided positive result in the fourth quarter. I see 2021 is being a little more normal in terms of revenues sort of spread across the year. Secondly, I would say that I think it’s going to be a much more normal year in the sense of sort of a more higher granularity to the revenue not as dependent on as few businesses like European M&A and UK – I’m sorry in U.S. restructuring, as I said, we’re really strong in 2020 many other areas very quiet. I think we’re going to see much broader participation. And so when I look at our pipeline, sort of our internal pipeline of assignments, I see lots more M&A deals. I see different kinds of deals like financings, I see us obviously, finishing up a lot of restructurings, where most of the work was done last year, but they will end up closing and call it, the first half of this year, in most cases, just given the timeline those normally take. And many of those M&A transactions, we’re working on we’ll have, because they’re not all huge blockbuster deals. They will have shorter approval timelines from a regulatory and shareholder point of view, and therefore, have a pretty quick move from sort of announcement to close. So, if I add up all that, it’s just a year of broader participation, higher granularity, at least as it looks right. And I think that will lead to what is probably a bit more normal looking year than the last couple were.

[Michael Brown:]

Okay. Thank you for taking my questions, Scott.

[Scott Bok:]

Okay. Thank you.

[Operator:]

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

[Scott Bok:]

Okay. I’ll just close by saying thank you everybody for your time and I wish everybody good health as we work our way through the pandemic, and look forward to speaking to you again, in our next call.

[Operator:]

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