Greenhill & Co Inc (GHL) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Greenhill fourth-quarter and full-year 2011 earnings call and webcast. All participants will be a listen-a 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 Richard J. Lieb, Chief Financial Officer. Sir, please go ahead.

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 am Richard Lieb, Greenhill's Chief Financial Officer and joining on the call today to 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.

Thank you, Richard. As we did in our press release I'm going 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 was a painful loss to the 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 build at Greenhill is strengthened further by our shared grief at 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'm sure everyone would agree was a very challenging deal environment. Our total revenue, which reflects the value movements in our remaining principal investments in addition to our advisory revenue, was up meaningfully for the quarter and modestly for the full year.

Our pretax profit margin was 34% for the quarter and 26% for the year, and our earnings per share of $0.67 in Q4 means that in EPS terms we were up about 11 times versus the prior year's quarter at 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 years' 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; and three, to maintain a strong given 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 to Richard for the others.

In terms of increasing our market share we are pleased with our growth and 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 that league tables are indicative of financial performance, that setbacks in one or two deals can determine the financial outcome for an entire year and that an occasional quiet 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's going to be quarter consistency.

What 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 fees paid globally, but we have continued to take share from them. In fact, if you look at the last three years in total we have 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 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 earned 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 have commented regularly over the course of the last year that our business is not as dependent on M&A completions as is often thought. In fact, less than two thirds of our advisory revenue this year was the result of the completion of an M&A transaction. Part of that is the function of our relatively new Capital Advisory business, which generated 9% of our revenue, mostly in the back half of the year, and fund placement transactions for real estate and private equity funds.

In sum, we feel very good about our advisory business performed in 2011 and I think you all know that advisory is our only business post the spinoff of our merchant banking business some time ago. You could even say that we achieved good results the hard way, given a couple of very significant assignments that looked slated for a fourth quarter close were derailed.

Finally, on the topic of revenue, let me say a few words about current market conditions. Obviously, it has been a couple of years now of pretty modest improvement in the transaction environment, and that followed dramatic declines in activity in 2008 and 2009. Our sense is that conditions seem ripe for 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 is still tremendous and certainly, but we are also seeing encouraging signs there.

Finally, I have made clear that are 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.

Thank you, Scott. I'm going to cover six major topics today -- compensation, our year-end headcount and how that has developed, our not compensation costs, our dividend, share repurchases in 2011 and their effect 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. On our prior two earnings calls, we reviewed our compensation philosophy and history. While I will not repeat that all now, I want to emphasize 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 wanted to add a word about the form of our compensation for 2011. We are using current cash in our standard restricted stock units only. We did not make our numbers by using any deferred cash in order to effectively push costs into next year, and in fact we are granting fewer RSUs this year than last, which should give us lower fixed cost and more flexibility going forward. You may recall that last year we set our fixed compensation cost, which is essentially base salaries plus RSUs amortization, would be about $120 million. 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, as 2010. We have not needed and do not anticipate the need for any layoffs, and in fact are still looking to grow on a selective basis.

As for our recruiting status, I can say we feel quite good about the high quality of the new financial analysts and MBAs that we are attracting.

Let me turn now to our non-compensation costs. Our fourth-quarter non-comp costs were $15.3 million, meaningfully below the third quarter number of $16.9 million and in line with the quarterly run rate we have experienced since the acquisition of Caliburn in Australia in the second quarter of 2010. For the year our non-comp costs 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 $1.80 per share, consistent with the last few 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 purchases of nearly 1.1 million shares and total repurchases, including settlement of some vesting RSUs of approximately 1.35 million shares at an average cost of $48.64 a share and a total cost of $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 of up to $100 million of our common stock through the end of 2012. We would like to do most or all of that, but that will be somewhat dependent on our earnings as well as the results of our plan to continue to liquidating our principal investment portfolio.

It is important to note that, due to our share repurchase activities, our current share count is essentially flat with our 2004 IPO share count, and the change in 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 and our previously sponsored funds of $44 million and our 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 markdown in a couple of our fund investments. During the last call, we explained we had entered into a 10b5-1 program for the disposition of our 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 these sales will be returned to shareholders in the form of dividend and/or additional share repurchases.

Now let me turn it back to Scott.

I would like to close by talking about some management and personnel issues. First of all, we include in our press release a few management adjustments, 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 American 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 years, so we have no doubt that he's up to the task.

Meanwhile Brad Robbins is stepping into Richard's role as head of financing advisory and restructuring for North America. Brad is a longtime senior restructuring banker who joined us 10 years ago after spending time at Houlihan Lokey and earlier as a bankruptcy lawyer at Wachtell Lipton.

Lastly, Hal Rodriguez, who serves in many senior capacities for us, was 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 to doubt about their capabilities to succeed in these new rules.

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 the long-term success of our firm and we've spent 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 over time 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 mold and we believe they can likewise play increasingly important roles.

And with that I would like to turn it over for possible questions.

(Operator instructions) Howard Chen, Credit Suisse.

Scott, you spoke about the overall environment a lot, but I was just hoping you could give us a bit more flavor on the composition of the revenue backlog as you see it.

I think it's still -- there's maybe a bit more restructuring going on than there was when the [aisle] 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 is strong as ever. Europe -- we are seeing some signs of improvement. But we're still a long way from the glory days of 2006 or 2007. But it does at least feel to us like the cyclical rebound that has kind of been going inch by inch over the last couple years, so it is continuing to at least progress in the right direction.

Separately, could you just give us an update on the fund placement business and how you think that is progressing for you all?

Yes. I think we feel very good about that. As we said in the press release, it was 9% of our revenue last year, but it was really very heavily back-end loaded to the last half of the year. And there's a very good reason for that, which is the 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. They had only joined a year before and it takes time to build a pipeline and have revenue start to pop out the other end of that pipeline. That started happening quite materially in the back half of the year.

So we would like to think that that business can be more like that on an annualized run rate as opposed to that as just six good months. So we feel really quite good about both the private equity and real estate side. We have had some good completions recently and we are also filling the pipeline with some good stuff at the beginning as well.

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 compensation and a five-year cliff vest, and wondering just how that evolved in 2011.

The only thing I would say is -- the only real change we made is for junior employees some of the vesting periods are little bit shorter than they maybe have been in the past. But that's really the only significant change.

Okay, thanks for taking the questions.

Devin Ryan, Sandler O'Neill.

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

Well, I guess I would say I don't feel like the environment has changed that much in recent months. Certainly -- just look at the statistics. A lot fewer deals got announced in the last four or five months. And I don't know, it just continues to feel like to us that a lot of stuff still is percolating behind the scenes. 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 on that call last time ended up not happening in a very public way. So I don't think anybody is -- there's a mystery as to what I'm talking about.

But I think apart from that, we feel about the same about the business. It has gotten -- maybe it does take a little bit longer to get things announced. Certainly, if you have regulatory approvals it can take 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.

That's great. And then just announced M&A volume, just looking at the beginning of this year, have started really at a slow rate. And so I just want to get a sense there as well. Does that feel indicative of how difficult the environment is currently, or maybe is some of that just normal, and it's going to take a little bit of time to get things going after the holidays and people back in their seats? I'm just curious on that.

I wouldn't read too much into that. I spotted we are number seven in the league tables, and you know how I feel about league tables, so we're not going to get too excited about that. But it really is indicative that you're absolutely right. The first three weeks of this year there have been very few deals that got announced. But I would not say that is indicative of what we are seeing behind the scenes. Obviously, three, four weeks is no basis on which to judge where the market is and I suspect we will see things develop more favorably as time goes on.

Okay, good. 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, any sense of where you feel like you could benefit from adding staff, or specifically are you at full capacity in the private capital and real estate advisory business?

I think actually those are areas where we to do selective additions. And I think frankly, throughout the whole firm, the way I would describe our stance is being opportunistic. In other words, if we see somebody who we think could be really additive to our revenue capability and our client base, we are going to take them, whether they sit in Europe or Australia or Japan or the US or Canada or any other place that we are not even at today. We are going to take them. I would say, in addition to being opportunistic, we are really quite cautious. We achieved a good result, we had good discipline in terms of cost and all that and I don't think we're going to take too much risk with those factors by aggressively hiring until we see the market continue to develop more favorably.

Okay, and then just lastly for me, on the real estate advisory business you have been on a couple of pretty substantial transactions over the past month. 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 I understand when there are some soft closings you can bill at that time. So I just want to get a sense of the time line of when you are recording fees for those types of deals and are the biggest fees for those deals typically coming on the final closing?

Sure. I would say, and this is consistent with what we've said throughout, that the fees are actually 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% from that.

Now, the caveats to that are it's not always -- as a matter of fact, it's very frequently not just that simple a fee structure. Very often you get paid a much smaller fee if historic investors to that fund return and you often get paid a higher fee if you bring new investors. But if you want it as a rule of thumb to say what does it at all net out to, I think something like a 1% or maybe a bit better, in some cases, is what it nets out to.

Now, how that gets booked and earned is, I would say, a typical fund -- it probably takes 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 or the most lucrative from our point of view. It sometimes, finally, can be the early was 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 in several chunks over the -- call it the 12-month period between first and last close.

I know that is hard to get the visibility on because they are effectively continuous securities offerings until the final close. You won't see names out there, you won't see advertisements. You may actually have picked up, and some people did, their real estate alert yesterday had two very large ads in it, one related to the related transaction of Steve Ross and another [dib] co. And the reason you can put those out there is those are completed, done, no longer being offered as securities. Until you get to that stage, it's hard to be giving a lot of guidance and visibility on the actual status of transactions.

And the reason we broke up the line item here, which we are going to do I think once a year, we are certainly not going to do it quarterly, along with our industry breakdown of M&A, is to start give people a sense for what the scale of this businesses.

Yes, I know, that's helpful and those were the deals I was alluding to. So I appreciate it.

Joel Jeffrey, KBW.

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

No. We have a good local presence, actually, in Japan and I do actually feel very good about that business. Certainly you have 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 sheets to 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 in coming quarters. But it's all driven locally. Obviously, they work with teams in Australia, the US, Europe, depending on where the targets may be. But it really is fundamentally driven out of a pretty strong team of three partners that we have there in Tokyo.

All right, thanks for taking my question.

Michael Wong, Morningstar Equity Research.

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

It's Richard. It's certainly nowhere near where it was during some of the peak years as 2008 went into 2009 and a little bit even early in 2010, where we were in a much more difficult economic environment. And clearly, because of availability and financing and low-cost financing, again, it's nowhere near back at that level. But there has been some increase in activity. There are clearly some industries out there, many of them transportation-related type industries, that really have fundamental issues out there, and we certainly are working hard and do our best to participate in those types of transactions. And then there's also some work we have done related to governments that has been out, publicly disclosed, that really falls very much, in our mind, into the restructuring business, and also some financing business that comes out of -- where we are helping advise on financing issues with people.

And then finally, Europe. What I would say is, while restructuring you think about 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 the last year or two because the economic situation is much more difficult there and the financing and the refinancing opportunities are less available. So we are really seen good activity out of our London office in restructuring as well.

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?

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

So any idea of how much kind of could you -- is remaining of that put? Has it been written down?

Essentially, what you do with a structure like that is, if there's 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 the size of your risk is a little bit more. And so in other words, what I'm saying is that our current mark would be the best guess of the value impact on the firm, based on the latest quarter's valuations.

Just a quick follow-up on that. So it's not like they actually fully like put that investment back to you and it's closed off. It's -- they still officially own that portion that could be marked back up?

That's correct. That's absolutely correct.

Okay, thank you.

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

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