Greenhill & Co., Inc.
Q3 2019 Earnings Call Transcript

Published: 6 Nov 2019

[Operator:]

Good afternoon and welcome to the Greenhill Third Quarter Earnings Conference Call. 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, today’s event is being recorded.I would now like to turn the conference over to Mr. Patrick Suehnholz, Head of Investor Relations. Please go ahead, sir.

[Patrick Suehnholz:]

Thank you. Good afternoon, and thank you all for joining us today for Greenhill’s third quarter 2019 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.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 were made.I would now like to turn the call over to Scott Bok.

[Scott Bok:]

Thank you, Patrick. We reported third quarter revenue of $87 million and net income of $0.63 per share. For the year to date, we had revenue of $194.3 million and a loss of $0.54 a share. The revenue for the quarter was almost identical to that of last year. For the year to date, revenue was down 26% as a result of our slow first half.Our third quarter results reduced the year to date revenue decline and we expect to reduce it significantly further in the fourth quarter. Throughout this year, we have benefitted from a respectable performance in U.S. M&A, improved performances in Australia, Canada, and Latin America, and continued strength in our capital advisory business globally, offset by a very low level of activity in European M&A.While most measures have global transaction activity or down about 20% from last year, we continue to see the environment for M&A activity as reasonably good in most of the places we operate and the same is true for capital advisory activity. Restructuring activity have been relatively slow given favorable credit markets, but we are succeeding in our goal of building a much more substantial restructuring business to complement our M&A and capital advisory businesses.Our expanded restructuring team has seen a big increase in new assignment recently, which bodes well for both retainer and completion fee revenue in coming quarters and years. With respect to cost, our compensation ratio for the quarter was 50% resulting a year-to-date compensation ratio of 69%. We expect to move our full-year compensation ratio of significantly further toward its historic range in the fourth quarter.Our non-compensation operating expenses, excluding accounting adjustments related to the earnout in our 2015 cogent acquisition were very similar to those of last year. Our pre-tax operating margin for the quarter was 29%. Our interest expense for the quarter reflects the improved terms of our recent refinancing and it has and will continue to benefit from recent declines in interest rates.Our effective tax rate was 23% for the quarter, and 25% for the year-to-date, and we continue to expect a rate in the mid-20% range going forward. In terms of capital returns, during the third quarter, we purchased 1.14 million shares and share equivalence through open market purchases and via tax withholding on restricted stock invested during the quarter. Together these repurchases were at an average price of $14.43 per share totaling $16.5 million. We also declared dividend of $0.05 per share.During October, we repurchased an additional 687,414 shares of common stock in the open market at an average price of $14.52 per share totaling $10 million. And as of October 31, we had $44.1 million of share repurchase authority remaining under the terms of our recent refinancing in addition to ongoing purchases of share equivalents via tax withholding on vesting RSUs.Under the terms of that financing, our share repurchase authority should grow next year and beyond. We see our current share price is highly attractive and will continue to be opportunistic as to how we use our share repurchase authority. We ended the quarter with cash of $117.5 million and term loan debt of $365.6 million, reflecting the repayment of a principal payment schedule for the prepayment of principal payments scheduled for year-end. Our net debt was $248.1 million at quarter end and going forward we aim to continue deleveraging even as we further reduce our share count.Looking ahead, we believe we are well-positioned for a strong finish to the year in terms of both revenue and profitability. Longer term, we are confident that the personnel moves we have made will lead to a business with increasingly diversified revenue stream, as well as greater aggregate revenue. Our acquisition of the capital advisory specialist Cogent partners more than four years ago, significantly diversified our revenue base.Following a few important hires two years to three years ago, our performance in Australia, Canada, and Latin America is resulting in greater revenue diversity. Last year, we substantially expanded our restructuring advisory team and this year have seen the level of restructuring advisory activity improv meaningfully. A larger restructuring advisory business should provide an important offset in revenue terms during future periods or weaker M&A activity coincides with increased credit defaults.More recent investments into additional sub sectors of energy and industrials into insurance and to shareholder advisory and into new offices in Madrid, Singapore, and soon Paris should further enhance the diversity and scale of our revenue sources over time. Recruiting is key to the expansion and diversification of our revenue base, and in the year-to-date we have announced the recruitment of eight managing directors.We currently have 79 client pacing managing directors and going forward our objective is to continue our balanced approach between recruiting new talent externally and cultivating homegrown talent internally. If it’s a result of all the foregoing initiatives, we succeed in our goal of generating greater and more stable revenue the returns to our shareholders should be amplified by both margin expansion resulting from our cost discipline and EPS accretion resulting from our significantly reduced and still sinking share count.Add to that the fact that our firm as well as our peer group is trading well below historical valuation multiples and it’s clear why we are excited about the value creation opportunity that lies ahead. Our team collectively owns 46% of the economic value of our firm through stock and restricted stock, and therefore has a powerful incentive to take full advantage of that value creation opportunity.Now, I'm happy to take any questions.

[Operator:]

Thank you. [Operator Instructions] Today's first question comes from Michael Brown with KBW. Please go ahead.

[Michael Brown:]

Hi, good evening guys.

[Scott Bok:]

Hello.

[Michael Brown:]

So, Scott, so, you know we are a month into the quarter, just wondering if you could kind of give us a little bit more color as to how you are expecting the fourth quarter to shape up, I guess is it possible for the revenues to be up sequentially in the fourth quarter? Thank you.

[Scott Bok:]

You know, it’s not really appropriate or possible for me to sort of give quarterly forecast and it’s always this time of the year when you down lay one quarter less. So, it’s difficult to do that. As I said, we do expect a strong finish to the year in both revenue and profitability terms, and exactly what that means in terms of dollars and cents, I think we will just have to wait and see, but we certainly feel like we're going to have a strong finish to the year.

[Michael Brown:]

Okay, great. And then on the comp ratio, I appreciate the color there, could you give maybe a little bit more information about kind of where the range of the full-year ratio will come in at, it sounds like you're kind of targeting a more consisting comp ratio to prior years, but you know it’s obviously kind of bounced around a little bit. So, are you looking for something in the low 60s, is that kind of the right way to think about it?

[Scott Bok:]

You know, I would say, it is simply going to be a function of where the revenue comes out. I mean, what you saw this quarter when we had an improved revenue was we had a significantly lower compensation ratio than we normally do, obviously what we’re trying to work towards is a compensation ratio that looks like the range we’ve had in recent years, which is more like mid-to-high 50s and when we had a low level of revenue in the first half, obviously that just becomes not possible.At some point you’ve got to – a fixed level of compensation and an amount sort of bonuses et cetera you have to pay, but we – by having a lower than normal ratio in Q3 we moved it in the right direction and we expect to do the same thing in Q4. You know, how far we can move it just simply really depends on where the revenue comes out in this last quarter of the year.

[Michael Brown:]

Okay, just one more if I could, could you just clarify, did you say there was 44 million left on the buybacks and then any color on kind of the trajectory of the pace from here? Thanks.

[Scott Bok:]

Sure. That’s 44 million less. And you know we're going to continue to be just be opportunistic. I think we could have hurried a lot faster and frankly would have missed some real market dislocations where we could get some shares – what we think are very attractive prices like we did over the last couple of months and we’re going to continue to be judicious about how we do it. Also, I just note there is limited liquidity in our stock and there are a lot of the rules around corporate repurchases that I'm sure you’re familiar with. So, there’s a limit to how fast we can do it even if we want to, but where we do have discretion, we're going to use that to try to get the most shares we can for the funds we have locked.

[Michael Brown:]

Okay. Thank you for taking my questions.

[Scott Bok:]

Sure. Thank you

[Operator:]

And our next question today comes from Richard Ramsden of Goldman Sachs. Please go ahead.

[James Yaro:]

Thanks. This is James filling in for Richard. The first question is just, you saw a net attrition of one MD this quarter, do you still expect to be able to grow MDs by, I think you talked about 10% in the past, have there really been any changes in the hiring environment that you would highlight?

[Scott Bok:]

We're obviously going to have some movement around the margin always in MDs so we're going to continue recruiting fairly aggressively and as I have said, we also of course are looking to develop talent internally as well. 10% in terms of net growth is certainly our objective. We’re not going to do that every single year. Some years we're going to do more, some years we're going to do less. I would say the recruiting environment continues to be pretty good.We are pleased with a couple of the recent announcements we’ve made; we’ve got others that we’re talking to right now. I’d say at this time of the year it’s not at all clear. We’ll announce more before the year is over, possible, but not at all certain. More likely we're spending most of our time right now building a pipeline for kind of first quarter or so of 2020 once year-end compensation has been paid to people of various firms.

[James Yaro:]

Got it. That’s helpful. And then second one is, you discussed a strong restructuring outlook for next year. How much of this is from expanding the team versus a stronger industry environment?

[Scott Bok:]

I think it’s a lot from expanding the team. We made a significant move really starting about 18 months ago to build out a substantially larger team, mostly in New York. I think the environment has gotten somewhat better over that 18 months, clearly there are some sectors where there is more financial pressure, energy, retail, et cetera. So, I don't think right now we're seeing the benefits, but someday we will see when you, the economy goes under recession and sometimes there is a lot of restructuring activity.What may seem most pleased about what we have seen here recently is, I think which is very clearly an increase in market share. And what other firms have described as a relatively flat restructuring environment we're really seeing our business grow pretty significantly and I think that’s just a larger team out on the field that’s getting more winds.

[James Yaro:]

Great. Thanks a lot.

[Scott Bok:]

Okay. Thank you. And I think that’s our last question. So, we thank everybody for dialing in and we’ll speak to you again in a quarter, if not sooner.

[Operator:]

Thank you. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.