Greenhill & Co., Inc.
Q1 2018 Earnings Call Transcript

Published: 6 May 2018

[Operator:]

Good afternoon, and welcome to the Greenhill First Quarter 2018 Earnings Results. All participants will be in listen only mode. [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 First Quarter 2018 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 Chief Executive Officer. Today’s call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm’s control and are subject to known and unknown risks, uncertainties and assumptions. The firm’s actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm’s future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made. I would now like to turn the call over to Scott Bok.

[Scott Bok:]

Thank you, Patrick. We reported first quarter revenue of $87.5 million and operating profit margin of 22% and earnings per share of $0.21. Adjusting for a tax charge on the vesting of restricted stock awards pursuant to new economy rules that took effect at the beginning of last year, our earnings per share was $0.34. In addition to highlighting on this call the key drivers of our performance, we will provide an update on our progress in relation to the recapitalization plan we announced last September. Focusing first on our top line, this was our best first quarter ever in terms of advisory revenue. The primary driver for the quarter was the very strong performance by our European M&A franchise. This obviously reflects a dramatic improvement from last year and supports our often stated view that, despite what was a quiet year for us in that region in 2017, we continue to have a very strong advisory franchise in Europe. It was also another strong quarter for us in capital advisory, driven entirely by a high level of activity in secondary transactions. Partially offsetting these areas of strength was the fact that we had a less robust start to the year in U.S. M&A and restructuring advisory and in Australia, Japan, and Latin America. It continues to be our view that conditions are generally favorable for M&A activity globally, particularly for the larger transactions that have historically been our primary focus. Meanwhile, we continue to see strong momentum in our capital advisory business. As noted in our earnings release, the impact of the new accounting requirements were revenue recognition and for expense reimbursement, had minimal impact in our revenue results. With respect to compensation costs, absolute dollars of compensation expense increased on the quarter, but the significantly increased level of revenue allow our compensation ratio to decline to 56%, back within its historic range for the years prior to 2017. As always, the compensation ratio represents a balancing of the goal of generating attractive profit margins for our shareholders against the need to reward our strong performers at all levels in a competitive manner. With respect to non-compensation operating costs, the bulk of the large difference versus last year is simply due to a difference in noncash accounting adjustments in the two periods relating to the earnout on our acquisition of Cogent Partners three years ago. There’s also a small difference relating to the fact that under new accounting standards, we now include expenses that are reimbursed by clients as revenue, rather than as an offset to operating expenses. Apart from those two factors, non-compensation operating costs were slightly higher than in last year’s first quarter. With respect to interest expense, we incurred $5.3 million for the quarter, up from last year, given the large borrowing we did as part of the recapitalization plan we announced last September. With respect to taxes, our rate for the quarter, excluding the impact of the accounting adjustment relating to RSU vestings referred to above, was 25%, which is within the expected range we indicated a quarter ago. The new U.S. tax law is complex and impacts us in various ways both positive and negative, but clearly, overall, we are a major beneficiary of the new law, with a tax rate for the quarter that is 10 or more percentage points lower than we typically reported for past years. In addition, the increased ability to access cash from abroad in the event that becomes useful, is also beneficial for us. Turning now to our dividend, our board declared a dividend of $0.05 a share consistent with last quarter. Now I will turn to an update on the share repurchase we announced as part of our recapitalization plan. In the first quarter, we purchased 1.76 million shares and share equivalents at an average price of $19.70 per share. These repurchases were mostly pursuant to a tender offer, but also included a small amount of open market purchases, and some purchases from employees in connection with RSU vesting to settle tax liabilities. As of quarter end, we had $191.1 million remaining under the share repurchase authority we announced as part of our recapitalization plan. During the month of April, we purchased an additional 1.25 million shares in open market transactions at an average price of $19.30 per share, for a total cost of $24.2 million. That means that as of the end of April, we have purchased a total of 6.43 million shares since our September recapitalization announcement at an average cost of $18.37 per share for a total cost of $118 million. This represents 41% of the $285 million in share repurchases we set as our objective last September, and leaves us with $167 million remaining to be spent on repurchases. To date, we believe our disciplined and patient approach to share repurchases has achieved good results. As one bit of evidence on that point, there were very few holders who accept that our most recent tender offer to purchase shares at $20.50 per share, yet after the expiration of that offer, we have the opportunity to purchase significant shares on the open market at below $20 per share. Going forward, we will continue to use this patient approach and the method of purchase

[Operator:]

[Operator Instructions] The first question comes from Devin Ryan at JMP Securities.

[Devin Ryan:]

I guess, maybe just start with a really high level question. Just love to just get some more characterization around the environment. I guess, I kind of get what helped the first quarter, but just trying to think about, are those themes kind of still in place? If any perspective on the backlog? Is Europe still gaining steam? Obviously, a good result there. And then, any sectors that are kind of sticking out to you as well as kind of feeling like activities picking up?

[Scott Bok:]

I think it certainly feels like a quite positive M&A environment. I mean, there have been something like 3x as many deals, $5 billion or greater announced in the year-to-date than last year. Those have kind of crossed a lot of different industries. I think the U.S. and certainly, now Europe are the strongest two markets, but we’re seeing good opportunities elsewhere as well. So look, I think it’s one of the better M&A environments we’ve seen, I think, in quite a long time. There’s never any guarantee that’s going to last for a long time. You could always have some external event that slows things down, but as we sit here today, it feels like there’s -- fine, let’s put it this way, the clients are very, very open to the idea of talking about strategic transactions, particularly toward the larger end, in terms of size.

[Devin Ryan:]

And then, I just wanted -- I heard kind of the comments at the end of the call around recruiting, and we’ve seen the hires that you’ve added in recent months. I guess, one, where is the management director headcount now? And then, it sounds like there’s an expectation that there could be more kind of senior banker additions, kind of through the rest of the year. So I know they’re not on the platform until they’ve signed on the dotted line, but are there any sectors that we should be thinking about that you’d like to bulk up? And then, are there any other advisory businesses that you feel like you want to be in or be bigger in that maybe aren’t just M&A focused?

[Scott Bok:]

Yes. So to touch on each of those, as we noted in the press release, we have 71 client-facing managing directors, including the various recruits we’ve just talked about. And we’ll include that, going forward, press release just because it tends to be a question. Yes, I do expect we’ll probably have more recruits. I -- frankly, I think, probably, at least a few more and it could be considerably more than that. It’s always, as you said, you can’t really count these things until they’re done. But we have a lot of interesting dialogues going on. I would say most of them continue to be in industry sectors, but really, across quite a wide range of them. Most of them tend to be either New York or to a lesser extent, London-based. So we’re just seeing a lot of very high-quality talent in those two markets across a lot of sectors. And of course, we’re not finished building out our restructuring team. We’ve added -- we have added several recruits below the senior Vice Chairman and Managing Director. We announced some weeks ago. And there’s more to come there. So that’s another active variable recruiting process.

[Devin Ryan:]

Got it. Okay. Great. That’s helpful. And then, just last one here on non-comp expenses, I think, last quarter we spoke about, kind of an annual run rate, kind of thought process of around $70 million, when excluding interest expense. And I know there’s some noise in this quarter and some moving parts. I’m just trying to think about, you back out the FX impact, and just some of the other items. I mean, how should we be thinking about a kind of -- maybe a run rate on non-comp expenses from here?

[Scott Bok:]

We still think it’s that $70 million on an annual basis is about right. I mean, of course, you can have some noncash things, like we had another little adjustment to the Cogent earnout calculation that goes into our statements every quarter. And you can have other odds and ends that appear, but we still think the number we gave last quarter is a pretty good estimate of where we expect the -- kind of a normal run rate to be.

[Operator:]

The next question comes from Jeffery Harte at Sandler O’Neill.

[Jeffery Harte:]

A couple of things. Forecasting around the news from the outside is always as much an art as a science, but I’m still having some trouble reconciling what is a record first quarter -- revenue quarter? What kind of a visible deal completions we can see out there? Was there kind of stuff in Europe that maybe we didn’t get as good of a tracking of? Or was kind of the secondary placement business that strong? Can you help me reconcile a bit?

[Scott Bok:]

Yes. Look, I recognized the estimates were a lot lower, and I sort of scratched my head at the differential being as large as it was myself. I don’t think there’s no sort of one simple answer to that. I think, certainly, the capital advisory business has been strong. We, as always, have a number of assignments where we can earn significant revenue, and it doesn’t appear in the various databases that analysts tend to look at. We probably had some -- I think sometimes they can be wrong in the fee levels. I mean, I don’t know how the various databases go about calculating fees. But every assignment has separate fee negotiations. Sometimes, you do a little better. Sometimes, you do a little worse. And I’m sure we may vary from that. Hopefully, on the positive direction sometimes. So I don’t view anything unusual about looking at the list of things we worked on and the revenue that came out of it. I just think, probably, in a whole bunch of small ways, people on the outside underestimated where we were going to come out.

[Jeffery Harte:]

Okay. And on the capital advisory business being strong. I mean, if I recall, fourth quarter was a record. This quarter was kind of strong as well. I guess I had two questions. One, can you quantify at all for us kind of the revenue contribution there? And then, I’m wondering, kind of what you’re seeing as far as an outlook? Is this something that could remain strong going forward? Are these just unusually good quarters?

[Scott Bok:]

I think I don’t want to sort of quantify because then, you get into this thing of having to do it every quarter. And sometimes, it’s just not meaningful to show in one business the ups and downs. But that business is really quite robust, and I think, to some degree, it’s kind of tied in some ways, to the M&A market. I mean, when valuations are pretty robust, there tend to be more activities than when the valuations are weaker. And in the private equity portfolios that our group sells, valuations are pretty robust. So if you’re a Chief Investment Officer at a pension fund or an endowment or something like that, and you want to rebalance your portfolio, you have a lot of flexibility to do that right now without taking big losses on your mark-to-market. So business conditions feel, frankly, very good there. And we expect them to continue, certainly, for the foreseeable future, to continue to do very well.

[Operator:]

The next question is from Ann Dai at KBW.

[Ann Dai:]

Scott, I just wanted to dig into the strong recruitment year-to-date, and your commentary around recruitment from shares. So I think some of what we’ve heard from your peers has been that, given the strong MA environment, bankers have a lot of work to do wherever they are, and so it’s been tougher to get them off platform and you really have to find those unique circumstances. So I guess I was hoping you could give us some insight into what worked for you guys. Some examples of the motivations for some of your new recruits and how you got them to join platform.

[Scott Bok:]

Yes. Look, I think there are two main drivers, I would say, of most Managing Director moves on Wall Street. One, can be that you just don’t like the platform you’re on. You feel like the firm has got some problems and you’re not sure that’s where you want to spend the next several years. And I’ll let you guess which firms might be in that category. The other category, I think, is people who maybe -- the absolute leading firms on Wall Street, but something changes internally for them. Maybe, suddenly, they have a new boss or maybe they didn’t get the next promotion they were hoping for, or just something changed in the internal dynamic and sometimes they can be then open to move as well. So I think they fall into those two categories. Those things happen in good M&A markets as well as weak M&A markets. I think what may differentiate us from our peers is so many of the independent firms have grown very aggressively in recent years. And frankly, we’re a lot smaller with a lot more whitespace and so the same Managing Director might look at one of our peers and think there is not really room for him because they’ve already got, say, several people covering his or her sector, and they may look at us and see that we don’t have nearly that much of whatever their sector is and so it looks very appealing. So I do think we have, simply because we’ve been less aggressive in recruiting in the last handful of years, I think we have kind of an advantage for the near term as we build out some of these sectors.

[Ann Dai:]

And secondly, on the buyback, and I apologize if this was already mentioned. I just hopped on late. But I recall you saying you -- the buyback could extend beyond the end of this year. So I mean, in your head, is there a natural cutoff plan or a specific time frame in which you would want to complete the objective? Or just move forward with excess cash on the books?

[Scott Bok:]

Look, I think we’re very disciplined as I said. I mean, there is a stock price above which we probably wouldn’t buy back more shares, but of course, that stock price changes over time. So as we see how the business evolves, we may get more bullish, we may get less bullish and buy fewer shares. So we’re going to be very thoughtful and economic about it. I think as far as the timing though, it really doesn’t make much of a difference. I mean, especially with interest rate moving up a little bit, whether we buy back an incremental share tomorrow or 6 months from now, it doesn’t really make a difference because we pay a very small dividend and you’re going to continue to pay that if you didn’t buy the share back, but we now are earning some interest on that cash sitting in the bank. So the only thing really we care about is the price at which we buy back the shares. And so the fact that it’s taken us, I guess, 8 months, really -- 7 or 8 months, to buy back the shares we have, I think, given the price we’ve been able to do that out of less than $18.5 a share, I think that’s worked out beautifully. And we’re relaxed about what pace the rest of the program is put to work at, and we’ll continue to be mindful of the right economic decision. And sure, at some point we might say that’s enough, the price has responded the way we thought it should, and we’re going to repay some of the debt more quickly or something. But that’s certainly not where we are today, and so will continue to play it out in the months to come.

[Operator:]

Our next question comes from Conor Fitzgerald at Goldman Sachs.

[Conor Fitzgerald:]

Probably just a longer term question for you, for how to think about the trajectory of the firm, post recap. I wouldn’t say historically you didn’t prioritize growth, but I think it’s fair to say, you were very returned and margin-focused as well, and you weren’t interested in growing at any price or in a way that you thought couldn’t deliver some of the margins you were interested in long-term. So just wondering how to think about at that philosophy is changing at all post the recap? Or if we should think about longer-term -- your philosophy being the same around hiring?

[Scott Bok:]

Yes. Look, there’s no question. We probably were more focused on profitability and returns than some of our peers and therefore we’re kind of less aggressive in terms of growth and hiring in recent years. But we’ve had periods in our history where we grew very rapidly. For example, you look at 2008, ‘09, ‘10, I think we roughly tripled our number of managing directors in that early days of the financial crisis. I think with the -- where the share price got to, with the recapitalization we were able to do, we think this is kind of a whole new chapter for us. And we do expect much more growth in part because we have all this whitespace and part because the firm has just developed to a point where we’re now a 22-year-old brand, and we can get more value out of that by having more people. And we just think it’s the right timing. Timing in terms of M&A market. Timing in terms of the history of our firm, and so we’re going to go crazy in terms of growth. But I would expect, just as you have seen a little bit last year and the year-to-date, I do think you’ll see an increased rate of recruitment and growth from us than you’ve – relative to what you’ve seen in recent years.

[Conor Fitzgerald:]

And then, maybe just a follow up on Ann’s question. I think you gave some color around what’s kind of making bankers interested in moving and coming over to your platform. Just a question on given how kind of robust the M&A market is going to start the year, whether the marginal basis for the same quality of talent you think has changed versus two or three years ago. Just wondering if the bidding process has gotten more intense for some of the top level talent you’re looking to attract?

[Scott Bok:]

I don’t -- I still feel it’s economic. I mean, you pay, of course, different prices for different people, depending on their level of experience and their -- what sector they’re in and their client base, and the kind of deals they’re capable of doing. But I still think we’re getting good value for money. Compensation on Wall Street is sort of not what it was in 2005, ‘06, ‘07, it’s not what it was in probably 1988 -- ‘98, ‘99. It sort of passed peaks of activities. So certainly there are places on Wall Street where people are getting paid very well. I think we’ll be one of them this year. There are other places where I think that’s less true, and I think people can be acquired effectively for good value. The other point I’d make is that we really -- it’s really almost never that I can think of in our history, where we really got into a sort of a bidding process with someone else. I still feel like our biggest competition in almost every recruitment is somebody staying where they are. And that they’re not playing us off against two or three other firms like ours. For whatever reason they like our firm, our brand, the whitespace we’ve got, and equally, there are other people we never see. And suddenly, we see one of our peers hired them and we never saw them. So I think people tend to sort of self-select for the firm, and the culture, and the brand that fits them best. And so I think it’s not like you’re sort of in a -- when you have a baseball free agent or something like that, where sometimes the bidding can get too high. I think we can still do things that are quite economic here.

[Conor Fitzgerald:]

Great. And then, just one more if I could. Appreciate all the color you gave around how you’re anything about repurchasing shares from here. Didn’t hear any thought around buying back some of the debt, once you’re kind of out of the -- once you’re out of the pay down window? But just want to double check that that’s not something you’re thinking about currently.

[Scott Bok:]

No. That’s definitely not something we’re thinking about currently. There’s a natural -- in our debt, there’s sort of an 18-month period where there’s not much you can do. I think that fits nicely with going in all the way next year and seeing how the buyback goes. Again, our goal as we sit here today, is to implement the full thing. But we’re going to be disciplined as to value as I’ve said. And if we did achieve our goals in terms of where we think the stock will be properly valued and we had a bunch of money left early next year, we can always refinance and repay part of the debt at that moment if we chose to. But again, that’s kind of a Plan B as opposed to the -- what we’re focused on right now.

[Operator:]

The next question is from Michael Needham at Bank of America Merrill Lynch.

[Michael Needham:]

So the first question I have is on, just kind of like the Managing Directors and kind of the comings and goings. I appreciate the -- giving this -- the headcount for the senior guys. Does that 71 -- does that include any pending hires or departures? And in the past -- the first few months of the year, you typically see an increase in your staff because you bring people on at the beginning of the year, and then, you might get a few departures and it kind of tapers down. Is this year very different, where you’re going to be trying to bring people in, in a part of the year that’s atypical for people to leave their seats or might that happen again, where the headcount stays flat or comes down a little bit?

[Scott Bok:]

I think we, first of all, the 71 includes, as is noted, I think, in our release, everything that we know today, every person who we have recruited, even if they’ve not yet joined yet, if we’ve announced them, let’s put it that way. It includes everybody we’ve announced. It includes every departure that we know of. So it’s certainly an accurate number as we sit here today. I don’t -- I think there’s still plenty of time left to recruit good people this year. I mean, we -- in the past years, it’s not like you do it all in sort of March and April. The reality is, these conversations can drag out for a while. I mean, literally, sometimes a banker can be in the middle of a transaction for an important client, and they just don’t want to leave that client in the large. And so you may wait for that deal to close or at least get announced before they make a move to join us. So I think we’ll probably have some throughout the year. I think the bulk of the remaining recruits probably will be in the next 60 or 90 days, but it could even be some that drag out beyond that. My guess is that we will have more -- maybe significantly more net MD additions from the 71 before we get to the end of the year.

[Michael Needham:]

Okay. And then, on productivity, from the press release language, it sounds like you’re saying that people who’ve left this year are maybe contributed lower amounts of revenue than the people you’ve brought on this year contributed at their last firms. Is that a fair comment to make?

[Scott Bok:]

I certainly -- that’s what I believe. I think that the people who’ve left, and we ended up commenting on an internal note that got posted the other day on one particular group of wonderful people, but in an area that was not particularly productive for us and so to effectively think about your productivity with a group like that, leading us, and some of the once we’ve recruited joining us. I mean, certainly, our goal, our objective, our belief is that the net impact of that is going to be higher productivity and higher revenue and profitability for the firm.

[Michael Needham:]

Okay. And one more I had was just on the revenue recognition. I think you guys recognized it was like $5 million of revenue in the first quarter for deals that completed in the second quarter. Can you just help me understand, is that kind of the common practice moving forward where, if the thing -- if the deal’s pretty much done, it’s going to get recorded in the quarter that you basically know it’s going to get finished. And if -- I mean, if you can share it, which transactions were those?

[Scott Bok:]

I wouldn’t want to share any specific transactions. I mean, look at the small amounts and these are things that if they didn’t -- they weren’t booked in Q1, would have been booked in Q2. So it’s not terribly material to us in any way. And I’m not an expert on accounting, but I will say this. There’s no choice involved here whatsoever. I think, for us and for all of our peers, there’s been a change in the accounting rules that we have to work toward and the old rules -- to give you one simple example, would be, if a transaction was absolutely finished on March 31, but the client said "I’d rather close on April 1 because it makes my internal accounting for the quarter easier." You would have booked that on April 1, under the old rules. Under the new rules, with absolutely no conditions left to it, with everything subsequently done and literally just waiting for convenience, you now have to book that on March 31. So that’s just one example. There are other things that go kind of in the other direction, like some retainer fees now don’t get booked, even though you may have not only earned them, but even then paid them. That can get deferred until later. So there’s some pluses and minuses, but probably the thing that can have a few million dollars impact here or there is what I described, which is something that essentially is done as of the end of the quarter, but not technically closed. And under the new rules, you’re required to book that.

[Operator:]

Our next question comes from Brennan Mc Hawken at UBS.

[Brennan Mc Hawken:]

I just have one left here. The real estate capital advisory team that departed, I believe, and you reference the fact that there was a memo that was released in the press. There was a quote in there indicating that it would be a benefit from forfeited deferred comp. Did that come into play here this quarter? Did that have an impact on your comp expense? And to what extent did that impact? And if it’s not this quarter, do you expect there might be an impact later?

[Scott Bok:]

Sure. I don’t think it’s an impact that shareholders will ever see at all. Effectively, what it does is put some dollars back in our compensation pool, which essentially just fund the new people we’re hiring. So it just makes the investment in new people easier when you have somebody leave and give you back some deferred comps. So it’s not really something that’s going to really be seen by shareholders because the money is going to be effectively reinvested in other people. And as I was just saying, if you have the people coming in be more productive than the others, and the people who are leaving are essentially funding some of the acquisition of new talent, obviously, it can work well to the benefit of the company and the shareholders. All right. Thank you. And I think that was our last question. So thank you all for joining us. And we’ll speak to you again in a quarter.

[Operator:]

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