Greenhill & Co., Inc.
Q4 2011 Earnings Call Transcript

Published: 25 Jan 2012

[Operator:]

Good afternoon and welcome to the Greenhill fourth quarter and full-year 2011 earnings call and webcast. 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 Richard J. Lieb, Chief Financial Officer. Mr. Lieb, please go ahead.

[Richard Lieb:]

Thank you. Good afternoon and thank you all for joining us today for Greenhill’s fourth quarter and full-year 2011 financial results conference call. I'm Richard Lieb, Greenhill's Chief Financial Officer 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, Richard. As we did in our press release I want to start today’s call by thanking everyone who expressed their condolences and heartfelt support following the recent loss of two of our managing directors. Jeff Buckalew and Rakesh Chawla as well as Jeff’s wife and two children in a tragic airplane accident last month. This is a painful loss for their families and all who knew them, not least their fellow Greenhill colleagues who had worked closely with Jeff for 15 years and Rakesh for eight years. While we continue to miss them both very deeply on a personal as well as professional level, I can assure you that everyone at Greenhill is determined to press ahead. The strong culture that they helped to build the Greenhill is strengthened furthered by our shared greed of their loss will see us through this difficult time. And with that I would like to turn to discussing our latest results. We are very pleased with all aspects of our results for both the quarter and the full year. Our advisory revenue was up 51% for the quarter and 21% for the full year despite what I am sure everyone would agree was a very challenging deal environment. Our total revenue which reflects the value movements in our remaining principle investments in addition to our advisory revenue was up meaningfully for the quarter and modestly for the full year. Our pre-tax profit margin was 34% for the quarter and 26% for the year and our earnings per share of $0.67 in Q4 mean that in EPS terms we were up about 11 times versus the prior year’s quarter and 41% for the full year. Note that all the cost and profitability figures we cite exclude $7 million of expense that is the acceleration of past year’s restricted stock grants that were made to our two partners who passed away. You will recall that we have consistently talked about having four main objectives for the firm. One to increase our market share of the global pool of advisory fees; Two, to consistently achieve the highest profit margin among our closest peers; Three, to maintain the strong dividend policy; and Four, to maintain a flat or even declining share count. I will focus on the first of these and then turn it back Richard for the others. In terms of increasing our market share, we are pleased with our growth in advisory revenue, both in absolute and relative terms as well as the increasing diversity of our sources of revenue. Our 20% growth for the year came despite quite a challenging M&A environment which worsened materially starting in August. That strong growth also came in spite of some very important announced transactions we were involved in that failed to get to the finish line. Our solid revenue performance for the quarter and full year should go a long way toward clearing up several misconceptions that developed about us over the course of the last year. Namely the league tables are indicative of financial performance, that setbacks and one or two deals can determine the financial outcome for an entire year and then an occasional quite quarter is indicative of the long-term strength of the franchise. The facts are that league tables can be highly misleading that every year we will have big transaction losses as well as big wins and this is simply not a business where there is going to be quarterly consistency. But should be important for shareholders and employees alike is the long-term growth and profitability of Greenhill which is best measured over periods of at least a year and by that measure we feel very good about our performance. When you look at our results in relative terms, they are also strong. Not all the big banks we compete with have reported yet, but the reports to date suggest that for the third consecutive year, Greenhill will have meaningfully higher growth in advisory revenue than our large bank competitors taken in the aggregate. This is what we mean by gaining market share. That group of very large banks still collects a large majority of advisory piece paid globally, but we have continued to take share from them. In fact if you look at the last three years in total, we’ve now grown our advisory revenue by almost 40% while aggregate advisory revenue for that large bank group is actually down materially over that period. As an indication of the increasing breadth and diversity of our business, we had a 30% more million dollar revenue clients in 2011 and that’s on top of 33% growth in that figure the year before. 26% of our million dollar revenue clients were new to the firm this year, which demonstrates that our client base continues to grow. In terms of the diversity of our revenue base, we had almost half our revenue outside of North America, with Australia performing strongly again and Europe showing some improvement despite what are still very difficult market conditions there. Within North America, we had our best year yet in Canada. By industry, we also showed good breadth. Many investors commented to me throughout last year on the very difficult environment for financial services M&A. But we ended up earning a quarter of our advisory revenue in that sector. Healthcare and consumer goods and retail also had good years for us and many other sectors also contributed importantly. Lastly, we’ve commented regularly over the course of last year that our business is not as dependent on M&A completion as is often thought. In fact, less than two-thirds of our advisory revenue this year was the result of completion of an M&A transaction. Part of that is a function of our relatively new capital advisory business which generated 9% of our revenue mostly in the back half of the year in fund placement transactions for real estate and private equity funds. In sum, we feel very good about how our advisory business performed in 2011 and I think you all know that advisory is our only business, post the spin-off of our merchant banking business some time ago. You could even say that we achieved good results the hard way given that a couple of very significant assignments that looked slighted for a fourth quarter close were derailed. Finally on the topic of revenue, let me say a few word by the current market conditions. Obviously it’s been a couple of years now a pretty modest improvement in the transaction environment and that’s how the dramatic declines in activity in 2008 and 2009 are senses that conditions seem right for a further improvement. Although we certainly wouldn’t venture to predict a straight line improvement given all the volatility in markets in recent months and years. By region, Australia still seems very active. North America still feels like it’s improving with many major companies looking to accomplish strategic objectives in the M&A market. In Europe, clearly there’s still tremendous uncertainty, but we are also seeing encouraging times there. Finally I’d make clear that our capital advisory business is in its early stages of development. So we expect that business to continue to grow. Now I will turn it over to Richard.

[Richard Lieb:]

Thank you, Scott. I am going to cover six major topics today. Compensation, our yearend head count and how that is developed, our non-compensation costs, our dividend, share repurchases in 2011 and their impact on our share count as well as share repurchase authorization for 2012. And finally I will provide an update on the continuing liquidation of our remaining principal investments including the status of our 10b5-1 program for our Iridium shares. Let me start with compensation. Our prior two earnings calls, we reviewed our compensation philosophy and history, but I will not repeat that all now. I want to emphasis that in 2011, we made meaningful progress in moving our comp ratio back towards its historical very low level. In comparison to our closest peers, we have had the lowest GAAP compensation ratio every year and this year is no exception. But our goal remains to get all the way back to the level we achieved every year through 2009. The comp ratio for the full year of 2011 was 53%, down from 57% in 2010. Further, while our results are impacted by the mark-to-market of our remaining principal investments. We believe it is very meaningful to also look at our compensation as a percentage of our advisory only revenues. On this basis our 2011 comp ratio was 51%. Note that all these figures exclude the accelerated RSU amortization that relates to our two partners who passed away. I want to add a word about the form of our compensation for 2011. We are using current cash and our standard restricted stock units only. We did not make our numbers by using any deferred cash in order to effectively push costs into the next year and in fact we are granting fewer RSUs this year than last, which would give us lower fixed costs and more flexibility going forward. You may recall that last year we set our fixed compensation costs, which is essentially base salaries plus RSU amortization would be about $120 million and we expect that to be up only slightly for 2012. One important final comment on compensation. In order to maintain a market leading comp ratio while at the same time paying our people competitively we need to be highly productive. Our advisory revenue which is our only active business, per employee, was in excess of $950,000 in 2011 and our total compensation per employee and that counts all employees was nearly $500,000. We believe both of these figures are above all of our closest public company peers and we believe that the per employee analysis is the fairest methodology for comparison as it eliminates potential distortions caused by title based productivity calculations. Turning to headcount; we finished 2011 with essentially the same headcount down only a few percent of 2010. We have not needed, do not anticipate the need for any layoffs and in fact are still looking to grow on a selective basis. As for recruiting status I can say we feel quite good about the high quality of the new financial analysts and MBA’s that we are attracting. Let me turn now to our non-compensation cost. Our fourth quarter non-comp cost were $15.3 million, meaningfully below the third quarter number of $16.9 million and in line with a quarterly run rate we have experienced since the acquisition of Caliburn in Australia in the second quarter of 2010. For the year a non-comp cost were up only 5%. There are obviously some differences each quarter but the annual run rate has been quite steady. Our dividend held steady this quarter at $0.45 per share for an annual dividend of the $1.80 per share consistent with the last two years. During the quarter we repurchased over 250,000 shares in the open market at an average cost of $38.62 per share and a total cost of $10 million. For the year we made open market purchase of nearly 1.1 million shares in total repurchases including cash settlement to some vesting RSUs of approximately 1.35 million shares of an average cost of $48.64 a share and a total cost or $65.8 million. After our dividend and our share repurchases we ended the year with cash of $62.1 million and debt of $28.1 million. Our Board of Directors has authorized the repurchase up to $100 million of our common stock through the end of 2012. We would like to do most or all of that, so that will be somewhat dependent on our earning as well as the results of our plan to continue liquidating our principal investment portfolio. It is important to note that due to our share repurchase activities our current share account is essentially flat with our 2004 IPO share count. And the change of our share count over recent years compares very favorably against any of our large or small competitors. Finally, let me touch on our remaining principal investments. We ended the year with investments valued at $112.9 million, which includes both our LP investment in our previously sponsored funds of $44 million, and a remaining Iridium stake valued at approximately $69 million. Our principal investments generated a fourth quarter gain of $8.7 million, but a full year loss of $9.9 million. For the quarter a big Iridium gain was partially offset by a fairly large mark down in a couple of our fund investment. During the last call we explained that we have entered into a 10b-51 program for the disposition of Iridium shares over a period of approximately two years or longer. The program is being executed exactly as planned. During the fourth quarter we sold 870,000 shares, at an average price of $6.72 per share for total proceeds in excess of $5.8 million. As we have stated before it is our intention that proceeds from the sales will be returned to shareholders in the form of dividend and/or additional share repurchases. Now let me turn it back to Scott.

[Scott Bok:]

I would like to close by talking about some management and personnel issues. First of all, we included in our press release a few management adjustment, some of which relate to the tragic loss of our two partners. Richard Lieb, our CFO, sitting here with me as well as our Head of Financing, Advisory, And Restructuring business in North America, is taking over as head of North America and Corporate Advisory. He will continue as CFO as well for a short while before we transition that to an internal candidate. Note that Richard’s role has always been primarily client facing and he ran Goldman’s real estate investment banking department for some year. So we have no doubt that is up to the task. Meanwhile Brad Robins is stepping into Richard’s role as Head of Financing, Advisory and Restructuring for North America. Brad is the long time senior restructuring banker who joined us ten years ago after spending time at Houlihan Lokey and earlier as bankruptcy lawyer at Wachtell, Lipton. And lastly Harold Rodriguez, who serves in many senior capacities for us, who is named Chief Operating Officer where he will continue to lead all aspects of our business outside of those related to clients and revenue. All three of these people have been with us for a long time. So, we have no doubt about their capabilities to succeed in these new roles. In addition, as part of our normal annual promotion process, we named five new managing directors from within the firm. Three focused on various roles in North America, and one each focused on Australia and the Nordic Region. We believe internal talent development is increasingly important to long-term success of our firm and we spend a lot of time and effort on that. The two colleagues we tragically lost in December were prime examples of internal talent development. They each joined us in their 20s and grew overtime to become major contributors to our client base and revenue as well as to our culture. The five newly promoted MDs are from the same mould and we believe and they can likewise play increasingly important roles. And with that, I would like to turn it over for possible questions.

[Operator:]

(Operator Instructions) Our first question comes from Howard Chen at Credit Suisse.

[Howard Chen:]

Scott, you spoke about the overall environment a lot. We were just hoping you could give us a bit more flavor on the composition and the revenue backlog as you see it?

[Scott Bok:]

I think there just may be a bit more restructuring going on and there was when the high yield market was as wide open as it was there for a while. But it’s still very heavily M&A dependent I would say. As I said, North America continues to look like it’s getting a bit better; Australia, strong as ever; Europe, we’re seeing some signs of improvement. But you know we’re still a long way from the glory days off from the glory days from 2006 or 2007 but it does reach, at least see it off a slight cyclical rebound that has been going on the for couple of years is continuing at least progress in the right direction.

[Howard Chen:]

Right thanks and then could you give us an update on the funds placement business and how you think that is progressing for you?

[Richard Lieb:]

I think we feel good about that as we said in the press release it was 9.9% of our revenue last year but it was really very heavily backed and loaded in the last half of the year and there is a very good reason for that, which is a larger part of our funds placement business we do for private equity funds and for real estate. The real estate is actually probably a slightly bigger business for us and they had only joined the year before and it takes time to build a pipeline and have revenue to start the pop up the other end of the pipeline. That started happening quite materially in the back half of the year, so we would like to think that business can be more of like that at an annualized run rate as opposed to that as they just in six good months. So we feel really good about both the private equity and real estate side and we’ve had some good completions recently and we have been also been filling the pipeline with some good stuff in the beginning as well.

[Howard Chen:]

Thanks and then finally Richard thanks for the color on the form of compensation and thoughts for 2011 I was wondering if you made any meaningful changes to the vesting period. This time last year you highlighted how the senior management took your competition in the five year clip fast and I am wondering just how that evolved in 2011. Thanks.

[Richard Lieb:]

The only thing I would say is that we don’t see the change we made is for junior employee some of the vesting period are a little bit shorter and may be that happened in the past but that is really the only significant change.

[Operator:]

Your next question comes from Devin Ryan of Sandler O'Neill.

[Devin Ryan:]

So, last quarter you guys commented on the conference call that you hadn't seen much of an impact yet on the book of or I guess the timing of active advisory assignments and when they were getting announced. So just wanted to get an update on that just given the volatile end of the year, you know has anything changed on that front from your view and does it feel like CEOs are just taking longer now than ever to commit to substantial transactions?

[Scott Bok:]

I guess I would say I don't feel like the environment has changed that much in recent months; I mean certainly it looks like the statistics there is a lot purity that have got announced in the last four or five months and I don't know it just continues to feel like us; but a lot of stuff still is percolating behind the scenes. You know obviously for us specifically some of the deals that we would have been, a couple of high profile deals we would have been talking about in that call last time ended up not happening for in a very public way. So I don't think anybody, you know there is a mystery as to what I am talking about. And so I think apart from that, we feel about the same about the business, its gotten maybe it does take a little bit longer to get things announced and certainly if you've got regulatory approval, it can take a longer to get them completed, but I still think we feel pretty good about the way the business is developing and frankly very pleased that despite losing some very high profile ones we still got to a good result as I said kind of the hard way.

[Devin Ryan:]

And then just you know announced M&A volumes, I am just looking at the beginning of this year have started really at a slow rate and so I just wanted to get a sense there as well. Does that feel indicative of how difficult the environment is currently or maybe some of that is just normal as its going to take a little time to get things going after the holidays and people back in their seats, just curious on that?

[Scott Bok:]

I wouldn’t read too much into that, I mean, you know I spotted we’re number seven in the lead tables and you know how I feel about lead tables. So we’re not going to get too excited about that. But it really is indicative and you’re absolutely right, the first three weeks of this year there have been very few deals, how they got announced. But I would not say that is indicative of what we’re seeing behind the scenes, I mean obviously three-four weeks is no basis on where is the jugular of the market is and you know I suspect we’ll see things develop more favorably as times goes on.

[Devin Ryan:]

And then in terms of, I appreciate the color on expectations for hiring for the year. But just in terms of different divisions within the firm, you know any signs of where you feel like you could maybe benefit from adding staff or typically are you at full capacity in the private capital and real estate advisory business?

[Scott Bok:]

I think actually those are as far we could do selective additions and I think frankly drop the whole firm the way I would describe us, our stance is being opportunistic and in other words if we see somebody who we think could be you know really added him to our revenue capability and our client base, we’re going to take them whether they sit in Europe or Australia or Japan or the US or Canada or any other place, so we’re not even ask today, we’re going to take them. But I would say in addition to being opportunistic, we’re really quite cautious and you know we achieved the good result, we had good discipline in terms of cost and all that and you know, I don’t think we’re going to take too much risk with those factors by aggressively hiring until you know we see the market continue develop more favorably.

[Devin Ryan:]

And just lastly from me, on the real estate advisory business you’ve been on a couple – and pretty substantial transactions over the past months and as that business becomes a bigger contributor, can you remind us how the fees for that business work; are they similar to your traditional advisory assignments? And also, you know I understand when there are some soft closings as you can build at that time, so just wanted to get a sense of you know the timeline of when you are recording fees for those types of deals and the biggest fees for this deal is typically coming on the final closing?

[Scott Bok:]

Sure. I would say and this is consistent what we have said throughout that the fees actually are quite similar to M&A fees. I think if we raise a typical $500 million fund, I think our expectation would be that we would make something like $5 million or 1% for that. Now the caveats of that are it’s not always as a matter of fact very frequently not just that simple a fee structure, very often you get paid much smaller fee if historic investors so that fund will return and you often get paid a high fee if you bring new investors. But if you wanted as a role firm to say what does it all net out to, I think something like a 1% or may be a bit better and in some cases as what it nets out to and how that gets booked and earned is I would say, a typical fund it probably takes these days, 12 months to raise from kind of the first closing to the last closing. You might have as many as certainly three, very often four or more closings along that way. So it’s not necessarily the case that the last one is the biggest to the most lucrative from our point of view. It sometimes frankly can be the early ones because you got a lot of people who are quick and they get into a fund early. So the revenue does tend to come in several chunks over call it the 12 month period between first and last close.

[Richard Lieb:]

Devin it’s Rich, I know that one is hard to get the visibility on, I mean, because they are affectively continuous securities’ offerings until the final close. You won’t see names out there, you won’t see advertisements. You may have actually picked up something and did the real estate alert yesterday had two very large entities, one related to the related transaction of [Steve Ross] and another [DIPCO] and the reason you can put those out there, is those are completed, done, no longer being offered securities, but when so you get to that stage it’s hard to be giving a lot of guidance and visibility on the actual status of transactions.

[Scott Bok:]

And the reason we broke out the line item here which we’re going to do, I think once a year end or quarterly, along with our industry breakdown of M&As to start to get people a sense for what the scale of this business is.

[Operator:]

The next question comes from Joel Jeffrey at KBW.

[Joel Jeffrey:]

Most of my questions have been asked and answered but Scott, I think, recently you talked about the strength of the business coming out of Japan just; I know you had said Australia still seem to be strong I am just wondering what your thoughts are going forward on Japanese activity, and are you driving that out of your Australia offices there, or is there a local presence you are thinking about?

[Scott Bok:]

No, we have a good local presence actually in Japan. And I do actually feel very good about that business. Certainly, you’ve seen a number of stories recently in the press about Japanese companies becoming more aggressive and even their government making comments in some cases about how they think companies should be more aggressive to use their strong currency, use their huge cash piles and strong balance sheet, go out and acquire good assets overseas. And we do see quite a lot of that percolating. So I have high hopes for our ability to do some really important things between Japan and the rest of the world, you know in coming quarters. But it’s all driven locally. I mean, they obviously work with the teams in Australia, the US, Europe, depending on where the targets maybe, but it really is fundamentally driven out of a pretty strong team of three partners that we have there in Tokyo.

[Operator:]

Our next question comes from Michael Wong at Morningstar Equity Research.

[Michael Wong:]

I was just wondering have you had a lot of increase in talk about the restructuring lately or has that still or you still say that’s going down the cyclical trough so?

[Richard Lieb:]

It’s Rich; its certainly nowhere near it was during some of the peak years as you know awake went into ‘09 or a little bit early in 2010 when we were in a much more difficult economic environment and clearly because of the availability of financing and low cost financing getting to nowhere near back at that level. But there has been some increase in activity; there are clearly some industries out there and even transportation related type industries that clearly have fundamental issues out there and we’re certainly working hard and do our best to participate in those types of transactions. And then there is also some work we’ve done are related to governments that’s been out and publicly disclosed that really falls very much in our line into the restructuring business and also some financing business that comes out of that we were helping advice on financing issues with people. And then finally Europe, what I would say is when restructuring you think about making of traditionally as a US business. We also have one of our partners based in London who is really quite steeped in restructuring in the European context and has been active, quite active last year too, because the economic situation is much more difficult there and the financing and refinancing opportunities are less available, so we’re really seeing good activity out of our London office in restructuring as well.

[Michael Wong:]

I was just wondering, was any of that $6 million write-down in remaining fund investments; was any of that related to the portion of funds that you sold off that was subject to a put?

[Richard Lieb:]

Yeah, some part of it was. Yeah, some part of that was and some part of it was from the remaining relatively small, but remaining fund investments that we still hold.

[Michael Wong:]

So I mean any idea as to how much I guess could you, is the remaining of that put, that hasn't been written down?

[Richard Lieb:]

You know essentially what you do with a structure like that is you, if there is a put back to you, essentially mark the asset to market every quarter and if the value of the asset goes up, you are obviously from an accounting point of view less at risk to the put and if it goes down you are the size of your risk is a little bit more. And so what I am saying is that our current mark would be the best guess of the value impact on the firm based on the latest quarter’s evaluations.

[Michael Wong:]

Just a quick follow-up on that, so its not like they actually fully like put that investment back to you and it close off, its I mean, they still officially own that portion that could be marked back-up?

[Richard Lieb:]

That’s correct; absolutely that’s correct.

[Scott Bok:]

Okay. I think that was our final question. Thank you all for joining and we’ll speak to you again in a few months, if not at a conference between now and then. Thanks.

[Operator:]

This concludes today’s event. Thank you for attending. You may now disconnect.