Greenhill & Co Inc (GHL) 2012 Q1 法說會逐字稿

Good day, and welcome to the Greenhill first-quarter 2012 earnings call and webcast. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note -- this event is being recorded. I would now like to turn the conference over to Mr. Richard J. Lieb, Chief Financial Officer. Mr. Lieb, please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's first-quarter 2012 financial results conference call. I am Richard Lieb, Greenhill's Chief Financial Officer. 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 these 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. Focusing on our first-quarter results, we are very pleased with our strong performance in what continues to be a challenging transaction environment. Our advisory revenue for the quarter was up 51% compared to 2011. It is fair to note that the first quarter of 2011 was our lowest revenue quarter for that year, and thus, helps year-over-year comparisons. But nonetheless, we see this as a very solid performance in a very difficult environment.

Similar to advisory revenue, our total revenue was also up meaningfully, benefiting from positive movements in the value of our remaining principal investments, in addition to our strong advisory revenue results. For the first quarter, our pre-tax profit margin was 30%. And we had earnings per share of $0.53.

As we've said previously, our results are best viewed over longer periods of time. And when taken together, the last four quarters' advisory revenue of $328 million is our strongest trailing 12-month performance since the first quarter of 2008, which reflects the growing strength of our global franchise.

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 a strong dividend policy. And four, to maintain a flat, or even declining, share count. I will focus on the first of those, and then turn it back to Richard for the others.

In terms of increasing our market share, our first-quarter 51% increase in advisory revenue far outpaced the market statistics for global M&A activity, as well as the first-quarter results announced to-date by the big banks. Globally, M&A completed volume for Q1 was down 42% versus the prior year. And M&A announced volume was down 32%. And three of our nine global large bank competitors have reported first-quarter results so far, and their aggregate advisory revenue was down versus last year.

The trend of our growing advisory revenue faster than the nine big banks, which are our primary competition, has been in place for some time. Coming into 2012, we had grown our advisory revenue 39% over the preceding three years, while the aggregate advisory revenue of the big bank group actually fell 17%. We are pleased that this trend towards significantly increased market share remained very much in place in the first quarter.

In terms of the diversity of our revenue base, we focus on breadth of industry coverage, geographic diversity, and offering many types of advice outside of traditional M&A advisory, including financing and restructuring advisory, and capital advisory or fund placement. It is the breadth of our revenue sources that has allowed us to outperform expectations each of the past four quarters. In the first quarter, we again earned almost 0.5 our revenue outside of North America. Australia made a smaller contribution than in recent quarters, although the strength of our franchise there is highlighted by our Firm recently receiving the award of Australia Independent Bank of the Year from ACQ Finance magazine. But Europe showed significant improvement despite what are still very difficult market conditions there.

By industry, we also showed good breadth. As listed in our press release, we completed 10 transactions in the first quarter across a range of industries. And this industry breadth is similar to the range of industries that are active in our pipeline of ongoing advisory assignments.

Lastly, in addition to solid M&A advisory revenue, we had increased contribution from financing and restructuring advisory during the quarter. And a moderate contribution from Capital Advisory, which we expect will continue to grow as a contributor over the course of the year and beyond. While it is too early in the year to predict how these trends will play out over the course of 2012, based on what we are seeing today, we expect the diversity of our revenue to continue across geographies, industries, and types of advice.

Finally, as it relates to revenue, let me say a few words on current market conditions. Obviously, it has been a couple of years now of two steps forward and almost two steps back in the transaction environment. And the last few months have reinforced that it will not be a straight-line recovery. However, our sense is that conditions are improving. And based on what we are seeing today, we do not expect the very weak market activity levels observed in the first quarter to be indicative of where full-year activity levels will be at year-end.

By region, North America feels like it is improving, with many major companies looking to accomplish strategic objectives in the M&A market. In Europe, clearly there is still uncertainty, but we also see encouraging signs there. And Australia remains active.

Finally, financing and restructuring advisory is seeing a modest increase in activity, despite strong financing markets. And I've made clear that our capital advisory business is in its early stages of development. So, we expect that business to continue to grow.

Putting all that together, we feel like the year got off to a decent start for us. But that our revenue opportunity for the full year is weighted toward the second half, given the low level of deal announcements in recent months. The fact that our run rate of retainer revenue continues to grow certainly bodes well for increased transaction activity going forward across our businesses and regions.

Now, I'll turn it over to Richard.

Thank you, Scott. I'm going to cover four major topics today. Compensation costs, non-compensation costs, dividend and share repurchases, 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. As we commented on our fourth-quarter earnings call, in 2011 we made meaningful progress in moving our comp ratio back towards our targeted level of below 50%, consistent with its historical very low level. In comparison to our closest peers, we have had the lowest GAAP compensation ratio every year, and last year was no exception. Consistent with our targeted level, we achieved a compensation ratio of just under 50% of total revenue in the first quarter, which we expect will easily be the lowest of our closest peers. As to any thoughts we have on the full-year compensation ratio, it will be dependent on our results over the remainder of the year, and balancing our target of a compensation ratio below 50%, with paying our employees competitively. Both of which we aim to accomplish through high productivity per employee, as we have demonstrated historically.

Now, let me turn to our non-compensation costs. Our first-quarter non-comp costs were $16.6 million. An increase from the first-quarter last year, and from the fourth quarter of 2011. The increase was primarily driven by increased travel associated with an increased level of business development activity, and a number of small, generally one-time items in other expense line. There are obviously some differences each quarter, but we do not expect the annual run rate for 2012 to be up meaningfully over 2011 levels.

Turning to dividends and share repurchases. Our dividend held steady this quarter at $0.45 a share, consistent with the last few years. During the quarter we repurchased over 200,000 shares at an average cost of $46.04 per share. The majority of these repurchases were for the cash settlement of vesting employee RSUs, with the balance being open market repurchases. After our dividend and share repurchases, as well as payment of annual bonuses, we again ended the quarter in a net cash position, with cash of $42 million and debt of $27 million.

Our Board of Directors has authorized the repurchase of up to $100 million of our common stock through the end of 2012, of which over $90 million remains available. We would like to do most or all of this amount, but that will be dependent on our earnings, as well as the results of our plan to continue liquidating our principal investment portfolio. As we've highlighted on previous calls, it is important to note, in connection with our share repurchase activity, that we continue to maintain a share count that is effectively flat with our 2004 IPO share count, which compares very favorably to both our large and small competitors.

Finally, let me touch on our remaining principal investments. We ended the first quarter with investments valued at $119 million, which includes both our LP investment in our previously-sponsored fund of $48.8 million, and our remaining Iridium stake valued at approximately $70.2 million. Our principal investments generated a first-quarter gain of $9.4 million, the vast majority of which is from Iridium.

On previous calls, we explained that in early October 2011, 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 continues to be executed exactly as planned. During the first quarter, we sold 915,000 shares at an average price of $8.10 per share for total proceeds in excess of $7.4 million. As we have stated before, it is our attention that proceeds from these sales will be returned to shareholders in the form of dividends 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. As we include in our press release, Richard Lieb will transition the role of CFO to Chris Grubb effective May 1, allowing Richard to refocus full-time on client advisory in his new role as Head of North American Corporate Advisory. Chris joined Greenhill six years ago from UBS, and has focused his time with us on advising clients on a variety of M&A and restructuring transactions, in addition to being responsible for a range of administrative roles for the Firm. As was the case with Richard, Chris will continue to work on selected client advisory assignments while serving the role of CFO.

Separately, Ulrika Ekman, who has served as our General Counsel for the last eight years will be retiring from full-time work. Ulrika has made a tremendous contribution to the Firm as a long-time member of the management team. And will continue with us on a full-time basis for some time before transitioning into a consultancy role. We have a search underway, and expect there will be many interesting candidates. We expect to hire someone for the General Counsel role who will support further growth in our business and capabilities through expanding our relationships and working with transaction teams on deal structuring and tactics, in addition to the usual General Counsel responsibilities.

Finally, I want to briefly mention that we are seeing a surge in interesting recruiting opportunities. And we hope to have some further news on that in coming weeks and months.

With that, we are happy to take any questions.

(Operator Instructions) Devin Ryan, Sandler O'Neill.

Just generally, when you think about the level of conversations in the M&A business today, it sounds like they are improving behind the scenes. And obviously markets have been more constructive. But how do you weigh that relative to what remains relatively low levels of announcements? Essentially, what do you think the biggest factor holding back deals from actually getting announced is, given the higher conversations and more constructive markets? Is it an event, some resolution in Europe, is it just market uncertainty? Or, lastly, are CEOs just more cautious coming off of what would have been obviously a very difficult end markets and a tough economy?

I think our sense is, and clearly we have indicated here, that we do think there is a lot of dialogue and activity going on behind the scenes. Clearly it has not showed up in announcements or completions year-to-date. I think it is just going to take time for things to flow through. We feel like they will flow through. We feel like we had a nice quarterly result despite a pretty lousy M&A environment in general. But it is just going to take time.

I think it is not, frankly, unlike what you hear about retail investors, where some people got, frankly, a little bit spooked by what happened with the volatility over the last couple years, especially the latter half of last year. And it's just taking time for people to refocus on longer-term opportunities, and perhaps take a little bit of risk in terms of expanding their businesses.

And do you have any sense or any color in terms of the backlog and the conversations that are occurring? Are we talking significant transactions, multi-billion-dollar deals? Or are they small or more specific niche type of situations?

I can only speak really for us, but I think we feel like there is probably, in terms of the things we're working on, probably a better mix of larger transactions than certainly there has been for the last couple of years. So, it is certainly not a case where it is a lot of more moderate-sized divestitures and things like that. There certainly are some very important strategic things being talked about as well.

Okay, great. And then just lastly, since you brought up a surge in recruiting conversations, I just would love to get your thoughts on what you guys specifically look for in somebody that is thinking about coming to Greenhill? And what the conversation, how the conversation goes, Greenhill relative to maybe some of your other independent peers.

I would say, first of all, it -- in a very large percentage of cases, starts with a person calling us, not us calling them. They identify themselves because almost everybody knows someone who works here. Some friend who's a partner who they worked with elsewhere, or they've known some other way, worked on deals together, whatever. So, it often starts with that. I often use the phrase -- loyal to a fault -- in terms of people we are looking for. We love it when we see people who have spent the last 15 or 20 years at one place, one of the big banks, and have now decided it's time to move on. In other words, that is not the kind of person who is likely to move on much once they get here, but likely to be equally loyal to us.

We like somebody whose clients think of him as an advisor. That is not the case for probably the majority of people on Wall Street, where clients may think of them as a salesperson, as a conduit to all kinds of different products within their big banking balance sheet and so on. But if you are an individual who comes along, who has got 15 to 20 years of experience, has focused most of that on a particular niche, could be a particular industry sector or region, have clients who think of you as an advisor, and you think you, over time, could bring those clients here, we are very interested. And those are the kind of people we are talking to right now.

Okay, great. Thanks very much.

Joel Jeffrey at KBW.

In terms of your fund placement revenues, I'm just trying to think about -- and I appreciate the color in terms of it being more towards the back half of the year. But in terms of the magnitude of your pipeline and what-not, should we think about it along the lines of what you did last year? Are you seeing a significant pick-up there? Any color you could offer would be great.

I certainly am hopeful that we would do meaningfully better than last year. If you remember, at year-end we said that fund placement last year was about 9% of our revenue. We had about $300 million of advisory. So, in other words, about $27 million roughly of that kind of revenue. But we made the point that it really was extremely quiet in the first half of last year. And that is because it is a long pipeline kind of business, and we were still very much feeling the effects of the financial crisis. And even more important, the larger of our two teams, which does real estate, had only been with us for several months. So, it really takes time to build a pipeline.

So, we would like to think that this year we would hope to get a good full-year result, not a good six-months result. And that as a result, we should end up with materially more revenue out of that business than we had last year. I don't think we are going to hit what I had hoped for in that business in a single year. We are really quite optimistic about what that business could grow into. And clearly it is going to take a couple of years to develop into that. But I think this year should be a good solid step forward.

Okay, great. And then in terms of the comp number, in the first quarter, was there anything along the lines of payroll taxes or anything that might have inflated it seasonally?

There is a bit of that, yes. There is a bit of that. That happens each year in certain jurisdictions with payments of bonuses. So, yes.

Okay. And can you give us the percentage of the comp that was deferred comp?

Do you mean amortization of prior-year grants?

Yes.

I'd say, if you wouldn't mind just waiting for the 10-Q. We just don't have the number handy in front of us. But it will certainly be in there.

Okay. And then just lastly, the tax rate was a little bit lower than what we were looking for. Was that just due to the geographic regions that the revenues were generated from?

Yes, that is always the issue for us, as to how it moves around. As you often hear in the news these days, the good old US-of-A has the highest corporate tax rate around. So, when we earn more money in other jurisdictions around the world, it does lead to a lower rate for us.

Great. Thanks for taking my questions.

Howard Chen, Credit Suisse.

Scott, I just wanted to clarify the commentary you made about the revenue opportunity being back-end weighted. Based on just what you are seeing, are you suggesting the current M&A fees should be accrued in the second half? Or do you just need to win more mandates to see that pick-up in the second half?

I think all I am saying with that is that, obviously, just industry-wide there was a very low level of announcements and completions in the first quarter. And, frankly, it's holding true for the first couple weeks of the second quarter. I do think that will change, not only for the whole industry, but I think that will change for us. And therefore, I think, at least based on what we see right now -- obviously things can change at any point -- but what we see right now, I would expect that, frankly, probably all of our competitors will have more M&A revenue toward the back half of the year than in the first half. And we won't be left out of that. That same thing should be true for us, I think.

Okay, great. And then, I was just curious to get updated thoughts on just the strategic acquisitions. I know in the past you have spoken about certain regions that you could do a Caliburn-like transaction, which has turned out great for you. I was just hoping to get latest and greatest thoughts on that.

Sure. I think, as I've said many times, I wish there were more Caliburn-sized opportunities, because that was really a substantial business in a very attractive M&A market of Australia. I don't think there are a lot of those around. I think things we can do inorganically, if you will, in other parts of the world are important, and will help us build our business. But I don't think they're going to have a dramatic near-term impact on revenue.

I think right now, the more interesting strategic opportunity for us is that, as we did in 2008, '09, '10, we're seeing some really attractive recruiting candidates. And if we could find our way, over the coming months, to bring in a fair number of those, and maybe do go ahead with a small strategic expansion or two in certain jurisdictions around the world, I think that would be a really meaningful expansion of our business. But it won't be the kind of big accretive-in-one-fell-swoop transaction that we had when we acquired Caliburn.

Great, thanks, Scott. And then final one for me. The dividend remains a really nice capital return vehicle for your shareholders. In the past, you've mentioned your confidence and desire to maintain that, and hopefully grow it, as market conditions improve. But just given the cash balance decline that we saw during the quarter, and some of your expectations for some near-term maybe softness or softer revenue landscape, any changes in your thinking there?

No, not at all. If anything, our confidence in that issue grows as time goes on. We continue to buy back shares. Yes, our cash balance is a little bit lower now. But that just seasonally is always the lowest point of the year. We not only pay our taxes and things like that, but we obviously pay cash bonuses to people. So, you expect it to be at the lowest this point of the year, and to generally be higher other times of the year. You can hear from my comments about back half of the year, about pipeline, about more retainers than we have seen historically, et cetera, that certainly I don't think there is any issue around the dividend.

Understood. Great, thanks a lot, Scott.

Douglas Sipkin, Susquehanna.

First off, Rich, congratulations. Secondly, I just wanted to talk a little bit on some of the numbers. In terms of Caliburn, I know there were some performance awards -- performance hurdles, I guess. I'm not quite sure, but I believe you guys indicated that it was reasonable they were going to make those awards. So, how, if at all, would you be recognizing that through the earnings model, whether it be in share count or comp expense, I'm not sure. Maybe you could clarify.

We certainly have amortized all the restricted stock that is still pending in relation to that. It is being amortized according to its time. We are still about a year away from the first of the two earn-out dates. But we are certainly still assuming at this point that it is much more likely than not to be achieved. And so, we have taken the step, even as of end of last year, to get fully up to date in terms of amortizing those restricted stock awards.

Okay. So, you've already begun to recognize that first portion of the award under the assumption that they're going to meet the revenue hurdle.

That is true for -- there are two types of awards we did [at the time]. For the restricted stock, we're doing what the accountants allow you to, which is to begin to amortize that as soon as you think it is going to be earned. With the actual shares that went to the owners of that business at the time we did the acquisition, those shares don't come into the account until they actually do earn them and receive those shares, which is a bit more -- right around exactly a year away.

Okay. So, that will probably be a Q1 2013 event?

Correct.

Okay, perfect. Also, I get the sense that you guys are thinking about getting more aggressive with hiring. I think it is obvious, to me, of course, that there is a plethora of talent out there, the industry is shrinking, and it is a challenging marketplace. But are you guys more willing to engage and maybe think about this being a 2007 or 2008 year in terms of hiring, as opposed to last year where you kept it flat? Because I can appreciate you're seeing a lot more people, but are you guys wanting to take the initiative and grow in 2012?

I would say, yes, we are. I was very clear last year, beginning of the year, that we had had a lot of recruiting. Not in 2007, but in certainly the financial crisis of 2008, '09, '10 we did. And we basically put the brakes on that almost completely last year. And, frankly, because it looked like the market had turned up. Now, the latter half of the year came, Europe to some degree got back into a real period of uncertainty. And that in turn has flushed what looks like a lot of very attractive talent out of the big banks. So, we are right now actively talking to a lot of those people. And we do indeed plan to bring a fair number of people in, who we think, in many cases, can really make a significant impact on our business.

I know you guys normally don't think about a specific target number or growth number, but can you maybe put some parameters around it? Are we at the point where you really feel the right people -- you could be potentially adding a bunch? Or are you still going to try to manage it with a focus on costs in the very near term?

We always try to walk that fine line to keep the profit margins in shape, but also bring in people. But we are talking -- I think you never know until you sign each one up. But I would like to think that we are talking, say, more than five senior bankers in the very near term. And it could be materially more than that. We'll see how it plays out.

A lot of this has evolved, by the way, just over the last several weeks. It is kind of surprising to me. And I think, frankly, it relates to continued problems at the big banks and continued regulatory uncertainty. And the fact that this is the down cycle that just doesn't seem to want to end. So, I think that has caused a lot of senior bankers at large firms to finally say -- you know what, I really would rather be at a place like a Greenhill where life maybe isn't quite so complicated. So, we have seen, really, as I said, a surge in opportunities literally over the last several weeks.

Great. And then just a final question. And you guys alluded to some of it. But it just feels like to me the revenues look pretty strong, and I would imagine better than most had it, myself included, by a decent clip. The fund placement activity was great in the second half of 2011. M&A has just been decent, but never incredible yet. So, what was the big driver this quarter? Was it debt advisory? It sounds like that was probably -- or debt financial restructuring advisory, that was maybe a little bit better than normal this quarter?

It probably was. I think the fundamental issue -- and look, we're going through a complicated time, so I certainly realize it is not easy for people to guesstimate where revenues are going to come out. But I do think clearly, after four quarters, you'd have to say there is a trend toward maybe some outsiders, certainly analysts, I think not really having come to terms with how broad our business is. And so, you look -- last year they might have said -- okay, you have exceeded what we expected; you did really well in Australia, did well in fund placement. This year I've just told you actually it was pretty modest in fund placement. I told you Australia was weaker than it has been in several quarters.

And so, you could say -- how did you end up with this kind of revenue? The fact is, it's a very broad business, more retainers across all the different activities that we do. Yes, there is some pick-up in debt restructuring. It certainly is not a booming business by any stretch, because financing markets are, frankly, wide open and available for those who want to refinance. So, it's a lot of little things. There's not really one thing I can point to and say -- we surprised everybody because we've earned a lot of this-or-that kind of revenue. It really is just a lot of things that add up to what, frankly, is a pretty attractive business, even in a tough environment.

Great. Thank you for taking all my questions.

And I think that is the last of our questions. So, thank you to everybody who joined us today.

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