Greenhill & Co., Inc.
Q4 2019 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Good day, and welcome to the Greenhill Fourth 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, this event is being recorded.I would now like to turn the conference over to Patrick Suehnholz, Head 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 2019 financial results conference call. I am 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 were made.I would now like to turn the call over to Scott Bok.

[Scott Bok:]

Thank you, Patrick. We reported fourth quarter revenue of $106.7 million and operating margin of 39% and net income of $1.05 per share. For the full year, we have revenue of $301 million and operating margin of 15% and net income of $0.45 a share. Our quarterly revenue was up 20% and earnings per share was up 133% from the same period last year.For the full year, our revenue was down 14%, and earnings per share was down 68%. In sum, we had a strong finish to the year resulting in respectable full year results on the top and bottom line, all consistent with our commentary on the past couple of quarterly investor calls.Our industry data shows the decline in global transaction activity versus the prior year and almost all of our competitors have reported declines in advisory revenue, the primary driver and our reduced revenue for the year was that low revenue in Europe more than offset increases in revenue in North America, Australia and the rest of the world.By type of advice, we benefited from significant improvement in restructuring advisory revenue relative to recent years as our recently enlarged team gained increasing traction throughout the year.Our capital advisory team had another strong performance, though fell short of the prior year's record revenue level. In an M&A, results were relatively strong nearly everywhere other than in Europe.By industry sector, we had good results in consumer products, financial services and media, offset by weaker results in energy, healthcare and technology. With respect to cost, our compensation ratio for the year was 59%, slightly above our target level as a result of lower revenue for the year.For the quarter the compensation ratio was an unusually low 42% in order to offset unusually high ratios in the first two quarters of the year. Our management objective, as always, is to achieve a reasonable compensation ratio on a full year basis, while also ensuring that our team is appropriately compensated at competitive level relative to their individual performance.Our non-compensation operating expenses for the quarter were $21 million, which was $3.7 million higher than the same period last year due to some foreign currency related losses compared to gains to the prior year along with a charge for uncollectible accounts receivable from a client and financial difficulty.For the year, our non-compensation operating costs were very similar to last year as the above-mentioned unusual cost were in aggregate about the same size as the unusual cost the prior year when we incurred an accounting charge related to their earnout on our acquisition of Cogent.We continue to monitor non-compensation expenses closely and are hopeful to achieve a lower annual level in dollar terms in 2020. Our interest expense for the quarter was somewhat lower than for the same period last year as the incremental cost of an increased level of borrowing was more than offset by the impact of lower market interest rate and a lower coupon premium on our debt following our favorable refinancing early in 2019. We expect our interest expense to continue to decline going forward.Our effective tax rate was 33% for the quarter and 40% for the year. Our tax rates for both periods were negatively impacted by the fact that we had a significantly lower than typical portion of our revenue and profit in lower tax rate jurisdictions particularly the UK, and a higher than typical portion of our revenue and profit in higher tax jurisdictions particularly Australia and Brazil.Our rate for the year was also negatively impacted by unfavorable difference between the grand price and market price on vesting restricted stock unit. We continue to expect to rate generally in the mid-20% range going forward.In terms of capital returns, we've continued to aggressively repurchase shares given our view that the market is underestimating our earnings potential, as well as the fact that our stock trades at a valuation multiple below that of our peers and far below its typical historic valuation multiple level.During the quarter we purchase 1.5 million shares and share equivalents at an average price of $15.98 per share. For the full year, we purchased 3.8 million shares and share equivalents at an average price of $18.04 per share.For 2020, our board has authorized $60 million in purchases of shares and share equivalents, which compares to $69 million we spent for such purchases during 2019. In the quarter-to-date, we've repurchased 345,723 shares of common stock at an average price of $16.47 per share for $5.7 million in total. Meaning, we have repurchased authority of $54.3 million left for the remainder of the year. We also declared a quarterly dividend for the quarter of $0.05 per share.We ended the year with cash of $114 million and debt of $365.6 million, meaning, we had net that $251.6 million. As of yesterday, our cash balance was up to a $133.9 million despite the incremental share of repurchases in January with a debt amount unchanged.Our required principal payment obligations are modest until maturity of our debt in 2024, but based on our business outlook as described below, we are aiming for significant deleveraging during 2020 alongside the additional share repurchases as referred to above.We entered 2020 with a favorable outlook across all of our businesses. The environment for M&A activity currently feels positive across the region that performed well for us in 2019 and our current book of assignments in Europe indicate the potential for a very substantial rebound in revenue there this year.In restructuring advisory, we ended 2019 with a much-improved level of multi-retainer fees and a much larger backlog of assignments that should get to completion during 2020. Recent tightening of credit availability and increasing cost for borrowers with weaker credit rating should also be a positive factor for this business.In capital advisory, the continued growth of pools of private equity capital and the increased market liquidity available to chief investment officers that are invested in those funds should result in a continuing favorable operating environment for that business as well.I'll close with a few words on our strategy. We remain focused on building a business with increasingly diversified revenue streams and greater aggregate revenue. That was the purpose of our acquisition of Capital Advisory specialist of Cogent Partners almost five years ago.That was the purpose of the recent expansion of our restructuring advisory team. That was the purpose of last year's expansion in Singapore and France. And that is the purpose of our continuing recruitment of M&A specialist across various industry sectors.Recruiting will continue to be key to our growth plans as well as the continued development of talent internally. In the past year we had a net five client base and managing directors such that we have 79 today, and we increase our total professional headcount by 11%.We have all the tools needed to continue to successfully implement our strategy. Our culture makes our firm a great place to work leading to both recruiting success and very high retention rates for strong performers.Our brand for high quality and independent advice has been built over decades of client service, and our team collectively owns 48% of the economic value of our firms through common stock and restricted stock and is thereby highly incentivize to generate strong results and create value for all shareholders.Now I'm happy to take any questions.

[Operator:]

[Operator Instructions] first question comes from Devin Ryan from JMP Securities. Please go ahead.

[Devin Ryan:]

Great. Hey, Scott. How are you?

[Scott Bok:]

Fine. How are you Devin?

[Devin Ryan:]

Good. Congratulations on a nice end of the year. A couple questions. I guess first one. So I heard your comments on Europe. And I'm curious just to unpack that a little bit. Is the recovery you feeling like a function of just it was a low bar in 2019? Or is Europe feeling actually quite strong on an absolute basis? And any more context you can provide around what you seeing and hearing in Europe as well, be appreciated?

[Scott Bok:]

Yes, sure. I think there are two things going on with our business in Europe. One is that as always it somewhat random when the specific enough deal closings end up falling. So we had a very good year in Europe in 2018. We had a very weak year in Europe in 2019. And that, really largely has to do with just the timing of various transactions we've been working on.We expect 2020, as I said, 2020 to look very substantially better than last year and really in any absolute terms, anyway you want to at it, we're really quite optimistic about Europe. Apart from that, kind of just the general randoms of when our clients end up transacting, there clearly is a better environment in Europe. I think having Brexit, at least to some degree resolved after well, turn out to be many years of uncertainty. On top of that, having the UK election which looks like it could have wide range of outcomes a few months ago, certainly having what I would call a business-friendly outcome to it.So, I think there are some really fundamental reasons why business should get better in Europe. But I think given on top of that, it was just an unusually quiet year for us. And I think regardless of the environment in Europe, I expected a very substantial rebound in 2020.

[Devin Ryan:]

Got it. That's helpful. Thanks Scott. And then just a follow-up. You know, the comment about the market underestimating kind of the earnings potential. When I look at consensus for 2020 its about a $1.70 and that would represent reasonably good year for Greenhill, just if you go back over the past handful. So I'm kind of curious how you guys think about earnings potential? And if there is a year that would point to kind of revenues that you would say, kind of represents kind of normalized level? Or kind of the right level to think about? Just any more context there would be helpful.

[Scott Bok:]

I mean, I can't be more specific in pointing at these specific numbers of course, but look I would say, I don't think there's really past period to look back to. What changed about the way our firm has evolved in the last couple of years really is that number one, we've got this very substantial capital advisory business, which we didn't have obviously till we acquired it almost five years ago that's proven to be a really strong and reliable performer for us over five years.I think secondly, we also had a presence in restructuring, but it was a very small business for us. We, starting about 18 or 20 months ago, we really dramatically increase the size of that group and by the time we got to the fourth quarter of 2019, it was clear that was going to be a really significant third revenue generator for us the alongside M&A and capital advisory.And then, lastly, if you just look at the kind of the regional variations in M&A. It's been a relatively quiet period for some years in Europe relative to the U.S. and last year it was a particularly quiet year for us. But I think if you assume that you're going to have something that's a little more representative across the region of what the teams are capable of there then look there's a lot of upside in terms of how M&A would look on a global basis versus last year. And then you add to that a growing restructuring business and what's been a proven contributor in capital advisory, and if we add that off to being pretty optimistic about our future here.

[Devin Ryan:]

Got it. So just to maybe say it different way. If I think about the revenue potential. You have more MDs today than you had in the past. Is the view that there's more revenue potential in the firm today than historically or I might not catching that right?

[Scott Bok:]

No. I would say definitely. Historically, we never had a really substantial size restructuring team. I think in Europe we've never have stronger team there, notwithstanding that last year was a difficult year. I think the team in terms of breadth and depth is better than it was even in the pre-crisis years for sure. And we've got the capital advisor business as well. We've got lots of other initiatives to improve things and certainly we've upgraded with every firm in our business does every single year in terms of trying to put the best team on the field that you can each year. But yes, I think we're -- the potential of this firm is certainly greater than has been historically which is why I don't point any given year and say, yes, that's the year we want to emulate. The years we want to emulate are better than anything you've seen for the last decade by meaningful margin.

[Devin Ryan:]

Okay, great. Thanks Scott. I'll halt back in the queue.

[Scott Bok:]

Thank you.

[Operator:]

The next question comes from Michael Brown from KBW. Please go ahead.

[Michael Brown:]

Hi. Good evening guys. Scott, if you can just first start on the revenue result this quarter, just wanted to get a little bit more color on kind of the area of strength by region and by type. Sounds like it was a good contribution from the non-M&A advisory businesses. And then, it would also be helpful if there was any pull forward activity this quarter just as you can think about modeling for the next quarter?

[Scott Bok:]

Sure. Just over the last part of the question because this is really the easiest. There was nothing material that was pulled forward in accounting sense or even in sort of things accelerating and it getting done more quickly. I mean, frankly there were times in the quarter, we actually expect it to do materially better, but deal get delayed that always happens on our business. But there certainly was nothing pulled forward perhaps to some degree, the opposite.In terms of where we did well. Clearly expectations were lower and if you look at the database that I know some of our analysts like look at, they were very substantially lower than what reality was. I think it really came from all three businesses. I think capital advisory had a very good year, but also a very good fourth quarter. The restructuring business which we invested a lot and as I said, about 18 months ago had a performance that just got steadily better throughout the year and by the fourth quarter was no very significant better than where it had been at the beginning of the year.But also in M&A -- again, outside of Europe it was quite good and I think in some places where maybe the databases aren't quite as good, it's sort of monitoring things. We had a good -- best year ever in Brazil and a lot of that fell in the fourth quarter. We had our best year and many years in Australia and a lot of that sort of fell in the last half of the year. And as I said, we did reasonably well in the U.S. and other markets also, really just with the one outlier on the negative side being Europe. So it was pretty much across the board. And I think a whole bunch of things that added up to a number that was quite a bit better than what most were expecting.

[Michael Brown:]

Okay. And just a follow up on that. How much of your revenues and I guess, just be the recent quarters have been from some of the non-M&A advisory businesses just from Cogent and from restructuring. And I know it probably change quarter-to-quarter, but if you kind of give a range on that, that would be helpful?

[Scott Bok:]

I don't really want to go into more detail and that. I mean, one of our competitors used to break out restructuring advisory unlike anybody does. So I guess, [Indiscernible] still does, because for them its such a large part of their firm. But I think the other one, the more M&A oriented firms I think have not done that. For the reason, we've never done, which is that it's very hard to draw the line between M&A deal and a restructuring deal. There's so much overlap between those areas where you have industry specialist, managing directors in the M&A side we're helping win business and do business in restructuring. So its hard to say. I mean, we do breakout capital advisory and that numbers has been in north of 50 million for three years in a row in terms of the revenue level there.And the secondary business we acquired five years ago. And in restructuring, I can say, it's certainly significant and its becoming more significant as we speak. I think 2020 will be those material upside relative 2019 for them, but it's hard to quantify any further than we do already.

[Michael Brown:]

Thanks. And just one last one from me. I just to dive into the MD headcount. So last quarter you ended with 79 MDs. This quarter looks like you promoted five in your at 79 MDs currently. So is the delta there just retirement driven? And then as you think about 2020 are you still targeting. I think your target is about 10 plus or minus net additions at any given year?

[Scott Bok:]

Yes. I would say, the target is roughly the same. What happened in the fourth quarter in terms of sort of accounting for pluses and minuses and managing director mostly was a number of people moving for managing director to senior advisor status which is on a retirement move, but it may be a later in the career move. So there is no one I can honestly say, for all of 2019 and 2018 that was a voluntary departure that had a material impact or material potential impact on our firm. So, we've done really remarkable job of retaining our best talent. And as people do get later in their career, though, some people will move to a little bit different status of senior advisor and that's really what you saw at year-end just as the new class of folks got promoted to managing director.

[Michael Brown:]

Okay. Thank you for taking my questions.

[Scott Bok:]

Okay. Thank you.

[Operator:]

The next question comes from Jeff Harte from Piper Sandler. Please go ahead.

[Jeff Harte:]

Good afternoon. A couple from me. One, kind of just clean up wise. Non-comp expense, if we kind of take this course $21 million and back out the two items you broke out, it gets us to $18.5 million. Is that kind of a reasonable base to build off going forward?

[Scott Bok:]

Yes. I think that pretty reasonable. We have like auto firms, we've taken a close look at all that stuff, and this year we had -- some years we have a little bit of sort of foreign currency gain, some year some losses. This year a flip from a gain to a loss and we had something that's very unusual for us. One situation involving, our reserve on a receivables which might in the end who knows may end up getting paid. But we try to be conservative on that sort of thing. So, I think if you take those out you're at a pretty good base for what we expect going forward.

[Jeff Harte:]

Okay. And you'd mentioned kind of capital advisory or capital markets kind of have a strong quarter. And I know we're kind of used to looking at Cogent and kind of being guided, so it used to be close to $40 million a year of revenues. Can you resize that secondary business at all for us as. Is it still kind of similar to the size it was or has become meaningfully bigger.

[Scott Bok:]

No. It's definitely become meaningfully bigger. I would say the first, we bought it again going back to sort of the way we structure the earnout that we originally put on the deal. We bought it on the basis that it would turn out to be an attractive transaction for us and they would get their earnout payment if they achieve about $40 million a year revenue run rate. For the first two years they got about as close to that as you can possibly get without quite getting it. In the next two years essentially went north of $50 million then north of $60 million and last year sort of settled back to the low 50s again.So certainly if you look at the last three years you would say that's no longer a $40 million revenue year business. Of course, all businesses are cyclical and can be impacted at any given year. But the recent data would suggest that we now hope for that to be a comfortably $50 million plus business for us.

[Jeff Harte:]

Okay. And kind of looking at the revenue outlook for 2020. When we look at kind of the visible transaction pipeline, which admittedly can be a dangerous pastime. But if we kind of take out really the largest transaction at least the companies don't think will close untill early part of next year, we're looking at a pipeline that from a store perspective looks weaker than it's been in a while. Can you kind of help, walk me through what we're missing here. Is it invisible stuff? Is it non-U.S. stuff? Is it tough to be announced because your outlook kind of tone sounds more optimistic than at least what we can see from the outside?

[Scott Bok:]

Yes. Look and I guess that was really the case for Q3 and four as well, especially Q4 when expectations were so much lower than the reality. Look, I think it's a lot of things. I think there certainly are a lot of things we're working on that we have strong expectations for announcements that will lead to transactions this year. We -- as I said are expecting another good year in capital advisory. We're expecting to continue to build momentum in restructuring. And we are seeing a more diverse geographic contribution from some of the markets where the databases aren't quite as good at picking up all the transactions that get announced that may not make the Wall Street Journal or something, but they're important in whatever region of the world they're in. So, it's a lot of little things and hopefully a few big things sprinkled in there that lead us to be reasonably optimistic. Obviously, there's along year ahead. So we'll see how it plays out. But we feel very good about the book of assignments that we're working right now.

[Jeff Harte:]

Okay. Thank you.

[Scott Bok:]

Okay. Thank you.

[Operator:]

The next question comes from Richard Ramsden from Goldman Sachs. Please go ahead.

[James Yaro:]

Thanks. This is James Yaro filling in for Richard. The first question is, I guess, the tone around this call as well as for the peers this earning season has been the focus on Europe on the M&A front. Is there any dialogue that you've heard? Can you talk about the client dialogue in the U.S. M&A environment especially in light of the fact that the industry data for January has been significantly worse? And obviously, understanding that doesn't necessarily reflect your business?

[Scott Bok:]

Yes. I think you know like -- I think the reason we and perhaps others speak of Europe more than the U.S. because it has been a reasonably good environment in the U.S. for some years now and we at least continue to feel, I think a lot of our peers do that it continues to be a pretty favorable environment in the U.S. You've got low interest rates certainly ready available -- availability of credit for most companies. You've got relatively high share prices, a pretty good economy and reasonable growth rates and all those things that probably generally suggest a pretty good M&A market. I think the reason I highlight a bit more and perhaps some others do Europe is really just the change there where it's been a long period post financial crisis of weaker activity there than in the U.S. there've been all kinds of good reasons for that including Brexit and elections and slower growth and all that. But if you look at this particular moment when it seems like some of those uncertainties were taken away and then I look you know into our own backlog of assignments; it just feels like there's a material change in Europe. Whereas in the U.S. it's maybe a continuation of what's a pretty good market.Now as to the first month of the year, I take your point that activity looks pretty anemic. It did last year as well and I don't know why this has occurred two years in a row, but last year if you look at the data for January or even January and February it looked like it was going to be a dreadful year. By time we got all the way to the year end it looked like M&A activity was down more like 10%, really not that different at all from the prior year. But things really ramped as the year went on. And so, I wouldn't draw. All I'm saying is I wouldn't draw any conclusions positive or negative from a month of activity in the M&A market. Certainly what we're seeing in the U.S. and increasingly in Europe is a pretty good environment for deal activity.

[James Yaro:]

Got it. That makes sense. Were there any significant pull forwards of deals in this quarter?

[Scott Bok:]

No.

[James Yaro:]

And then the final cleanup one is, in the past you've given the interest income number for the quarter. I know that wasn't in this release. Is there any way you could size that for the quarter?

[Scott Bok:]

I would just call it trivial, really. We've tried over the years, I mean, we used them many years ago be in the investment business in a pretty big way. And then for years we brought out investment income and then later we changed the interest income. I mean, we're actually have become over time a very simple business and in today's very low interest rate world interest income is really trivial for us. So we decided it was easiest to just have one line of revenue. We don't really have in some ways different lines of business, yes, M&A restructuring and capital advisory are all somewhat different. But they're all advisory and they all overlap with each other in various ways. So we just consolidated on the one simple line.

[James Yaro:]

Got it. Make sense. Thanks a lot.

[Scott Bok:]

Okay. Thank you. And thanks everybody for calling in and we'll speak to you next quarter.

[Operator:]

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