Greenhill & Co., Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good day, and welcome to the Greenhill Third Quarter 2018 Earnings Conference Call and Webcast. All participants today will be in a listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Mr. 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 Third Quarter 2018 Financial Results Conference Call. I'm 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 third quarter revenue of $86.8 million, which is 80% above last year's level and operating profit margin of 24% and earnings per share of $0.43. For the first three quarters we had revenue of $262.8 million which is up 53% relative to last year. Our operating margin for the first three quarters was 23% which was negatively impacted by $4 million of non-cash cost related to the accounting for the earnout on our 2015 of Cogent Partners and our earnings per share was $0.99. That figure would be $1.14 if you adjust for a tax charge of the vesting of restricted tax awards pursuant to new accounting rules that took effect at the beginning of last year, and principally impacted our first quarter. Focusing first on our top line the third quarter was a third consecutive period of substantially increased revenue in comparison to last year. In the year, when advisory revenue for our broad competitor group appears to be relatively flat versus last year. We're pleased that nearly every metric for our business is indicating significant improvement. Specifically we're showing notable increases as year-to-date in terms of new client's total fee paying clients and clients with the $1 million, $5 million and 10 million fee levels. From a retail perspective our revenue from European clients is multiple times higher than last year and we're also showing improvement in revenue from clients in Egypt [ph], North America, Australia, Japan and Latin America. By type of fee we're showing significant increases in retainer fees, transaction announcement fees and completion fees. And on the capital advisory side we're on track for another record year in revenue from secondary market transactions where I think it's [indiscernible] we're the market leader. 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. It just now feels a lot to us like we're anywhere close to peak in terms of deal activity. For example the number of deals $500 million are greater with a European buyer or seller is on track to be similar to the level of past eight years and not much more than half the peak level of 2007, that's despite the fact that stock market value has appreciated substantially since then meaning there were far more business and assets of that scale today. Apart from M&A, we're also seeing continued favorable conditions for capital advisory transactions. In contrast, restructuring activities continue to be lighter, but we've made great progress and our objective of building substantially larger team in that area and preparation for the next economic downturn. Finally on top of the fact that marketing conditions for advisory services continue to be reasonably favorable for all market participants. It's worth noting that this year's financial results from our publicly traded competitors continue to indicate that independent advisors like our firm are taking market share from the large banks. We believe that trend still has a long way to go and that we can be a major beneficiary of that trend given our strong brand with both clients and talent as well as our global footprint. Turning to compensation absolute dollars of compensation expense increased significantly for the quarter and year-to-date, but our compensation ratio was 55% for both period back within its historic range for the years prior to 2017. With respect to non-compensation operating cost the bulk of the difference versus last year is due to a difference in non-cash accounting adjustments in the two periods relating to the earnout on our acquisition of Cogent. There's also a difference between the two periods relating to the fact that under new account standards we now include expenses that are reimbursed by clients revenue rather than as an offset to operating expenses. Our non-compensation operating cost for the year-to-date were $58.6 million which includes $4 million of non-cash charges related to the earnout adjustment noted earlier. At $4 million negatively impacted our operating margin for the year by about 1.5 point. Adjusting for the impact of the Cogent earnout in both 2018 and 2017 and the aforementioned accounting change for reimbursement, our non-compensation operating expenses would have been $49.1 million for the year-to-date as compared to $53.9 million for the comparable period last year or down about 9%. For the interest expense we incurred $5.7 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 was 25% which is within the expected range we indicated following the reduction in US tax rates. Turning now to capital returns to shareholders, our board declared dividend of $0.05 per share consistent with last quarter. Also in regard to return of capital I'll now provide an update on the share repurchase we announced as part of our recapitalization plan. In the third quarter we took advantage of the declining share prices for our sector and some increased availability of shares by repurchasing approximately 2 million shares and share equivalence and an average price of $29.85 per share. As of quarter end, we had accomplished 82% of our original $285 million share repurchase goal and had $50 million remaining under share repurchase authority we announced as part of our recapitalization plan. During the month of October, we have purchased an additional 0.4 million shares in open market transactions at an average price $27.08 per share for a total cost of $9.7 million. That means that as of the end of yesterday, we had repurchased a total of 10.9 million shares since our September recapitalization announcement at an average cost $22.35 per share for total cost of $244.7 million. This represent 86% of the $285 million in share repurchases we set as our objective last September and leaves us with $40.3 million remaining to be spent on repurchases. Going forward we'll be opportunistic about the use of our remaining funds available for repurchases aiming to maximize the benefits for long-term shareholders. Given the reduced share count resulting from our repurchase activity. Our employees collectively own today approximately 40% of the equity economics of our firm through their holdings of common stock and restricted stock. At quarter end we had a cash balance of $125.4 million and term loan debt principal of $336.9 million. Taking into account the additional share repurchases referred to above our cash balance as of yesterday was approximately $134.3 million. As we noted in our press release the control pace of our share repurchases means we never got close to the level of net leverage that our recapitalization plan initially contemplated and we should soon start to deleverage further from the current level by means of schedule debt repayments and the continued generation of cash flow. Our close with an update on recruiting in the longer term potential that creates for us. First of all, we've now recruited 11 Managing Directors for the year-to-date. It's important to note that these people joined the summer between six days ago and six months ago. So have contributed almost nothing to our strong year-to-date revenue. Our long time MD group that is producing this year's revenue, but the group of new MD's represents 15% of our total Managing Director headcount and we believe it is an important source of potential revenue growth for next year and beyond. Our recruiting pipeline remains very strong and we remain intensely focused on continuing to expand our capabilities and increase our scale in order to further enhance the revenue generating potential of our firm. We're excited about the qualities the bankers we're attracting and we're doubly excited about the way our recapitalization plan has leveraged the upside potential for both our shareholders and our senior team. Whatever revenue growth we can generate should have a magnified impact on earnings and shareholder value given the fixed nature of much of our non-compensation expense, the impact of deleveraging overtime. Significantly lower tax rates and a much reduced share count. Finally I note that we just posted in our website a new investor presentation that summarizes much of what I've just said, will also reviewing our overall position and strategy. With that we're happy to take any questions.

[Operator:]

[Operator Instructions] and today's first question will be from Devin Ryan with JMP Securities. Please go ahead.

[Devin Ryan:]

So I guess I first wanted to maybe touch on the momentum that you mentioned that you're having with new clients, that this helping drive some of the success that you're having this year. I mean I know you're always trying to win new clients so that's not really a new dynamic. So I guess I'm just curious what you would attribute that success to, is it newer bankers maturing on the platform or something else?

[Scott Bok:]

I think it's a combination of newer bankers maturing on the platform including people who have been promoted internally over recent years. But also you know I talked a lot about the number of recruits that we brought in this year. But we brought in quite few last year as well. I mean for people really to fully get up to speed it takes more time than 12-month period. So some of the major new clients we've added this year relate to bankers that we brought in, a year ago or even two years ago and I think as we continue add more industry expertise and various sub sectors it kind of position us to continue to grow the breadth of the client base.

[Devin Ryan:]

Got it helpful and then just a follow-up to that. With some of those newer bankers added over the past several years. I know you don't like to give too much specific on the backlog. But if you can just maybe characterize what you're seeing in your backlog today. How that compares to year ago or beginning of the year? It sounds like you still feel like there's quite a bit momentum. So even if in kind of broad strokes you can give us some perspective.

[Scott Bok:]

Sure look I think momentum is sort of materially better than it was year ago or even two or three years ago and I haven't seen any signs of that changing in recent weeks with some of the market volatility not to say that it couldn't happen in some point. We certainly haven't seen it yet. I mean it's just one measure. If you just look at the number - we list pretty much every significant M&A transaction we do on our website. Sometime it takes us little bit time to get client approval and so on, but we put it up there. If you look at the number of announcements for the second and third quarter and you annualize that six months that is significantly higher than it's ever been for us. So not every single one of those is a huge one of course we're working on wide range of transaction, but it's certainly is an indication that we're getting a lot of things announced. It certainly is broader and more diverse this year in terms of the region it's coming from and even the sectors that it's coming from. I think that's probably as good an indicator as any and I would say our kind of the we call it the internal backlog of things that we're working on, but aren't announce to public yet, it feels like that is, is likewise very healthy. If it has been for throughout the course of this year.

[Devin Ryan:]

Got it very helpful. And then just last question, heard your remarks on the leverage and because deleveraging plan and maybe commencing that soon. Can you remind us when you can contractually start the pay down debt and then just with excess cash building beyond that. Like is it possible to expand the repurchase plan above and beyond, if you could just remind us of that, that will be helpful.

[Scott Bok:]

I think the key things to know for those who haven't looked closely. We do have a schedule of repayments and that schedule does sort of ramp up to a higher level even starting the end of this quarter, so there's some schedule debt repayment pursuant to which the debt will decline overtime. The other thing to know that as of April this year, we reached the point when there is no penalty at all for our refinancing. So at that moment, you could - I mean I think there's often sort of first time issuer interest coupon premium that one pays and so, one might think we might be able to refinancing it a lower coupon and if you wanted to tweak other terms of things obviously you can go to the market and try to do that as well. So there's that kind of 18-month period where there is a penalty for refinancing or anything like that and then that goes away, well I guess about six months from now.

[Devin Ryan:]

Perfect and then on the just share repurchase element. Any thoughts there?

[Scott Bok:]

Look I think, we've as I've said from the start we're trying to be patient and somewhat clever about this. I know last quarter it seemed like liquidity to some degree was drawing up and so I made the comment, that it might will take us to the middle of next year to be finished and almost as soon as I said that, somewhat to my surprise despite a very strong second quarter our stock went down, our whole sector went down. You find when you're trying to buyback lots of share, that there is much more liquidity as things are going down, then when things are going up. And so we were able to do a huge amount of it over the third quarter and continuing into the month of October. So there's not much less to do and we're going to continue to be clever or try to be clever anyway about how we do it, such that we can get the maximum number of shares in, but pretty clearly given what we've accomplished already the concept that it might take middle of next year to get done is obviously really obstacle [ph] at this point.

[Devin Ryan:]

Yes, got it great. Thanks very much Scott. Appreciated.

[Scott Bok:]

Sure thank you.

[Operator:]

Today's next question will be from Jeff Harte with Sandler O'Neill. Please go ahead.

[Jeff Harte:]

So a couple of questions, one. On the operating environment we seem to be hearing about accelerating concerns that kind of the global trade war fares will start weighing on large cross border transaction activity. You kind of addressed this in your comments, but I'm hoping dig a little deeper into it, that's historically an area of strength for Greenhill last cross border transactions. It sounds like you're not kind of seeing this at least increase and concern potential slowdown there, that we've at least heard mentioned from others.

[Scott Bok:]

I would certainly say we're not. The people use the word large and mean different things. If you're saying might there be some decline $5 billion, $10 billion and $20 billion deals. I mean I think I've actually seen that in the last few months, it's still up over last year but it certainly seems so quite a down little bit. We like to do some of those deals of course and we do some, but yes we make a lot of money on deals that are sort of $500 million to a few billion and I think those are not quite sensitive. I mean we also tend to work very much on strategic transactions between public companies. I mean certainly sometimes we're selling things to private equity and sometimes we're working on behalf of private equity. But the bulk of our work is public companies doing a transaction for strategic reasons and at least we've not seen yet any evidence that those companies are dissuaded from pursuing strategic goals in the M&A market just because of brief period of market volatility.

[Jeff Harte:]

Okay and the recapitalization. The term loan, am I right in seeing that the term loan principal balance increased quarter-over-quarter despite having made principal payment in the quarter. Is that right? And if so why?

[Scott Bok:]

No that's not right. It's gone down by a small amount because the scheduled payments are quite small, but no just check your math there again. It's definitely down a little bit and it'll be down a bit more at the end of this quarter.

[Jeff Harte:]

Okay and finally, on kind of headcount in hiring. I think in the press release you mentioned kind of hiring juniors and kind of building out as well as the MD growth. Is there any kind of change in thinking or how should we think of that relative to kind of MD productivity kind of increased hiring of the junior level?

[Scott Bok:]

We definitely had a little bit of evolution in our thinking there. So we've actually hired quite a lot of sort of VP level, what I will call mid-level bankers VPs and Principal and Senior Associates. We've done quite a lot of that particularly in the places where we've added a lot of managing directors which obviously is very heavily in New York this year. And essentially deciding that if you're going to bring a real estate specialist, an insurance specialist, a utility specialist that you have to build out a team that has that very specific sort of technical expertise. It's not be as critical in some other sectors but in a number of these it specialized enough that you really want to get not only an expert in senior level, but some expertise at junior, mid-level. As we get bigger we definitely are building out the mid-level and junior ranks to support those MDs and hopefully drive a higher productivity.

[Jeff Harte:]

Okay, thank you.

[Operator:]

Today's next question will be from Michael Needham with Bank of America Merrill Lynch. Please go ahead.

[Michael Needham:]

I guess the first question just is a follow-up on restructuring advice in particular. I mean you guys made I think a big senior hire a little while ago and it sounds like you're starting to add to that group. Can you give us some numbers in terms of how many people you've added, how you're structuring the compensation make sure these people are incentivized just given how the environment is pretty low default environment. Thanks.

[Scott Bok:]

Sure. I think we set up a time we brought in another senior banker in that area that we wanted to build up to having 25 restructuring professionals in New York and hopefully it will grow out further from there, but that was kind of the initial thought and we're very close to already there. It happened maybe more quickly than I would have thought it was possible, but you know the individual we hired created a fair amount of notice in the market and knew a lot of people and so, VPs and associates and analysts sort of showed up pretty rapidly, who had expertise in that area. So we're very pretty well aware. We hope to be by early next year already and clearly that's an area right, [indiscernible] rate it's very low right now. There's not a massive amount for them to doing [indiscernible] M&A bankers. So obviously it's been a very strong year for us, it's not largely due to restricting. It's really largely due to M&A that group to 25. I'm still very glad they're in place now because every time you see interest rates creep up or markets fall or economic worries. You think we maybe a day closer to the point where the default rate ticks up and these guys can really start to generate the revenue for us.

[Michael Needham:]

Okay, all right. Thanks. And then on the leveraging just wondering, I think in addition to those the quarterly amortization payments that are required. I thought there was a clause where like half of your excess cash flow kind of goes back in repaying the debt. Is that right? And what's your priority going to be assuming you're able to generate decent cash flow if this kind of revenue trend continues. Will you take all of that and kind of your first priority is pay the debt down?

[Scott Bok:]

The first part of your question, I won't pretend to be sort of a real expert on the structure of loan documents. But the term you referred to is a little bit different than you're suggesting. There is kind of what the lenders call a cash sweep where they sort of take more of your cash and the schedule debt repayment, but it really only applies in sort of downside scenario and frankly from a creditors point of view. If you're doing really well the last thing they want is their money back. If you're doing poorly, they get worried, so they want more of your cash flow. So that kind of sweep certainly is not going to apply to us with the kind of results we're having these days and hopefully going forward. So we will have the issue as you kind of touched on, in the second part of your question which is, what do you do if you continue to have a strong cash flow. What do you do with that cash flow? Clearly high priorities paying down debt and we have forgetting the schedule repayments to do that. We could some more of that, if we chose to [indiscernible] loan agreements. I think we may as we kind of allude to with the tail end of our investor presentation. We may look for opportunity to sort of grow the dividend to some degree overtime and then kind of some degree slow the pace of deleveraging, but that's only because we're enjoying very strong results right now and we may frankly meet up to this, where we can do a lot of debt repayment and deleveraging and still be able to pay out more money to shareholders as well. so that's just an indication of one direction we could go obviously, it's going to depend on the results and clearly the debt repayment have to be the highest priority and the schedule is one that we put in place a year ago and we like the pace of it and we think it gets us frankly without any kind of refinancing fully repaid before the debt is due. So and that was the way we sort of structured the debt initially, was at level where we thought that it could, if we had reasonable results just be repaid fully out of cash flow rather than having to depend on refinancing down the road.

[Michael Needham:]

Okay, all right. Thanks and just last one. I think some earlier quarters and some peers called out the accounting for deal pull forward was there any meaningful deal pull forward in the third quarter.

[Scott Bok:]

We didn't report last quarter the specific impact of that and we don't intend to going forward. That accounting change that relates to revenue recognition is obviously a permanent change that applies equally to all of our peers. Every quarter there's going to be some revenue that's going to pushed out mostly relating to retainer fees and then also every quarter probably for all of our peers, was likely to get some revenue pull forward relating to transactions where all the material closing conditions are met prior to quarter, but the parties chose to close just after the quarter end. Typically that revenue pull forward it's going to be larger than the revenue pushed out for us and all of our competitors. And I think for this quarter looked directionally the difference was a bit larger this quarter than in past quarters, but for the full year I wouldn't expect the revenue timing differences from the new accounting to be very meaningful at all. What we focus on is really full year GAAP results and clearly by pretty much any measure this is going to be a very good year for us in that regard, our EPS for the first three quarters is already ahead of what the consensus full year expectation was in January 1 and that's despite some unusual things like the cost related fee accounting for the earnout and unusual first quarter tax charge. So that, I just think it's a distraction to sort of get into some sort of reconciliation every quarter because there are puts and takes every quarter and of course, by the time you get to two quarters from now, you're going to comparing to a period where that's been in place as well. So that's but hopefully that gives you some directional sense.

[Michael Needham:]

Okay, thank you.

[Operator:]

Today's next question will be from Brennan Hawken with UBS. Please go ahead.

[Brennan Hawken:]

I just wanted to follow-up on that. So I took a look at what it looked like the stuff that closed in the early part of the fourth quarter. It looks like there was a pretty large deal impact one of your biggest in your pipe, it was for about $15 million to close to beginning of the quarter. Could have that caused some of that larger pull forward phenomenon that you had referenced in your prior remarks?

[Scott Bok:]

[Indiscernible] has always been the case. I would never comment on a specific transaction. The number I think you're quoting I'm guess and sort of deal logic guess at what our revenue might have been. We've always for confidentially and competitive reasons we obviously had never said or never going to say what a particular fee is, how it's structured between retainer announcement and completion fee or when it's owed and when it's booked and when it's paid. So I think we have to kind of leave it as the more general remarks I made a minute ago.

[Brennan Hawken:]

Okay and then just really quick clean up one, trying to reconcile. I think you'd indicated that you felt so there was really no sign of the peak in the M&A cycle, but then when you were talking about the restructuring teams, you [indiscernible] we might be getting closer and closer to busier times for the restructuring business. so I'm - can you help me maybe reconcile that, was the restructuring comment more speculative one or how can those two just trying to figure out how those stay [indiscernible] together?

[Scott Bok:]

Yes I think restructuring it is a bit speculative. I mean we've been almost 10 years with auto, a recession in this country and I don't think we're going to 20, so somewhere in the next. I don't when it is, I don't see a recession kind of near term, but at some point it's out there and as rates go higher and other factors may develop and clearly it's going to come. Right now in the M&A side as I've said we really haven't seen any kind of slow down or pause or anything like that. And also I wouldn't dismiss the possibility to have a period where both are quite active. I mean for the bulk of my career, one would be very busy and the other would be pretty much dead and you would have sort of seven years out of [indiscernible] great for M&A and three were great for restructuring, life is pretty simple to sort of figure out what was happening. But in the post kind of during the financial crisis, you obviously had a M&A pulled way back, but you also had restructuring kind of not pick up as much as expected given the feds first time ever moved to zero interested rates and obviously in Europe, the Central Bank got even more aggressive. So I do think that it's possible when restructuring starts to pick up or that there might be some legs left to the M&A market, but that's obviously all somewhat speculative because we've never seen a period like the last several years, who knows how things will develop in those two markets going forward.

[Brennan Hawken:]

Okay, thanks Scott.

[Scott Bok:]

Okay, thank you and I think that's all our questions for today. So we thank everybody for dialing in and we'll speak to you again in a few months. Bye now.

[Operator:]

The conference is now concluded. We want to thank you for attending today's presentation. And at this time, you may now disconnect.