Greenhill & Co Inc (GHL) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to the Greenhill second quarter 2012 earnings conference call. 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 Chris Grubb, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's second quarter 2012 financial results conference call I am Chris Grubb, 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 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 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 10K, 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, Chris. The second quarter was obviously a slow one, both for the entire transaction market and for us. We had very few significant transactions close in the period and also had fewer nonpublic assignments come to fruition than usual. As we have always said, quarterly results will vary widely based on the timing of individual assignments, and it's best to evaluate our results over longer periods. With respect to this quarter, that is particularly true. Notwithstanding the soft quarter, we feel good about how the year is developing for us, both in absolute terms and relative to our competitors. Let me start with the data and then provide some more color.

Our advisory revenue for the quarter was down substantially compared to 2011, but on the year-to-date basis is down only 12%. Our total revenue is also down modestly on a year-to-date basis, benefiting from positive movements in the value of our remaining principal investments in addition to our advisory revenue results. For the second quarter, our pre-tax profit margin was 7%, and we had earnings per share of $0.07, while on a year-to-date basis, we achieved a pre-tax profit margin of 22%, the same as last year's first half margin, and achieved earnings per share of $0.60, which is down slightly from $0.64 last year. You will recall that we have consistently talked about having four main objectives for our 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 Chris for the others.

In terms of increasing our market share, our year-to-date 12% decline in advisory revenue far outpaced the market statistics for global M&A activity, as well as substantially exceeded the year-to-date results announced so far by the large banks with which we compete. Globally, the volume of completed M&A transactions for the first half was down 30% versus the prior year. Five of our nine large global bank competitors have reported second quarter results so far, and their aggregate year-to-date advisory revenue was down 19% versus ours down 12%. You will recall that the trend of our growing advisory revenue faster than the nine large banks, which are our primary competition, has been in place for some time. Coming into 2012, we have 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 two quarters of 2012.

In terms of how we want to build our Firm, we are focused on breadth of industry coverage, geographic diversity, and offering many types of advice outside of traditional M&A, including financing and restructuring advisory, as well as capital advisory or fund placement. It is the breadth of our revenue sources that has allowed us to continued gaining market share during this challenging transaction environment. In terms of geographic diversity, in the year-to-date, we've seen significant improvement in our revenue from European clients despite the continuing economic and market challenges there that you are all familiar with This has partly offset a reduced level of revenue in Australia, which comes after a very strong couple of years in that market.

By industry, we also showed good breadth. As listed in our press release, we completed six transactions in the second quarter across a range of industries, and this industry breadth combined with what we showed in the first quarter also reflects the range of industries that are active in our pipeline of ongoing advisory assignments. Specifically, industrials, healthcare, and energy all seem quite active. Lastly, in terms of assignment type, we've seen an increase in the financing and restructuring advisory areas and an increased contribution from capital advisory partially offsetting lower M&A completions in year-to-date.

All of the foregoing comments relate to our performance relative to the market and relative to our competitors, so let me add a few comments on current market activity and our performance in absolute terms as well. As the old saying in the money management business goes, you can't eat relative performance, so we understand that absolute performance is important even if it is highly dependent on the general market environment. As I said at the start, we actually feel quite good about how the year is developing for us. With the caveat that the likelihood and timing of specific transactions is inevitably uncertain, recent transaction announcements, combined with our book of current assignments, suggests advisory revenue similar to or better than last year continues to be the most likely outcome for our Firm for the full-year 2012. Whether you look at data for the entire market, where announced M&A volume was down 19% year-to-date, or at advisory revenue of our largest competitors, it is clear that kind of outcome would be quite different from the likely outcome for our large bank competitors. In other words the macro-environment may be giving us some help in recent weeks when the data has shown some pickup in overall M&A activity, but the more important factor is likely our continuing market share gains. It is more clean than ever that clients have increasing concerns with the conflicting interest that are inherent in the universal bank model and are thus turning to firms like ours for independent advice on a variety of matters. As a Firm that is entirely focused on the client advisory business that has a strong presence in each of the largest markets for transaction activity that has deep experience in almost every industry sector and that now has 16.5 years of building a brand, we are well-positioned to benefit from that continuing trend. Now, I'll turn it over to Chris.

Thank you, Scott. I'm going to cover four major topics today, compensation costs, non-compensation costs, dividends and share repurchases, and finally, I will provide an update on the continuing liquidation of our remaining principal investments. Let me start with compensation. As we've commented previously, our goal is to achieve a compensation ratio below 50% driven by very high productivity per employee. In the first quarter, consistent with our targeted level, we achieved a compensation ratio just below 50% of revenues. In the second quarter, due to a soft revenue results, our quarterly compensation ratio was above our targeted level at 60%, such that our year-to-date compensation ratio is now 54%. While we expect that will be the lowest GAAP compensation ratio of our closest peers, we are also quite focused on the absolute level and hope to drive that lower for the full-year depending revenue levels. To preempt a couple of obvious questions on compensation, despite the recent recruiting we have announced, we expect our headcount will be up only 5% or so by year-end, and we still expect our fixed compensation costs for the full year to be very similar to last year's level of around $130 million. That should allow us to compensate our people competitively while also achieving a good outcome for shareholders this year.

Turning to our non-compensation costs, our second quarter non-comp costs were $15.4 million, a significant decrease from the first quarter and a slight decrease from the second quarter of 2011. As was the case in the first quarter, we continue to incur increased travel expenses associated with an increased level of business development activities, but that should be seen as a good thing. The decrease from the first quarter was primarily driven by the lack of a number of small, generally one-time items we incurred the first quarter. There are obviously some differences each quarter, and we are up slightly on a year-to-date basis compared to 2011. But consistent with our comments on the first-quarter call, we do not expect the annual run rate for 2012 to be up meaningfully over 2011 levels.

On the topic of dividends and share repurchases, our dividend this quarter is $0.45 per share, consistent with the last few years. During the quarter, we also repurchased over 290,000 shares at an average cost of $34.8 per share. It's important to note in connection with our share repurchase activities 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. After our dividend and share repurchases, we again ended this quarter in a net cash position with cash of $41.6 million and debt $27.8 million. Our Board of Directors has authorized the repurchase of up to $100 million of our common stock through the end in 2012, of which just over $80 million remains available. We plan to continue our open market purchases in the second half, with the amount of such repurchases dependent on our earnings as well as the results of the continuing liquidation of our investment portfolio.

Finally, let me touch on our remaining principal investments. Our principal investments generated a second-quarter gain of $2.2 million and a year-to-date gain of $11.6 million, the vast majority of which relates to Iridium. On previous calls, we explained we'd entered into a 10b5-1 one 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 second quarter, we sold 1.08 million shares at an average price of $8.57 per share for total proceeds in excess of $9.2 million. As we have stated before, it is our intention that the net proceeds from these sales will be returned to shareholders in the form of dividends and/or additional share repurchases. We ended the second quarter with investments valued at $112.2 million, which includes both our limited partner investment and our previously sponsored funds of $50.2 million, and our remaining Iridium stake valued at approximately $62 million. Now, let me turn it back to Scott.

I would like to close by talking about some very exciting personnel developments. On our first-quarter earnings call, we commented that we were seeing a surge in interesting recruiting opportunities. Since then, we've announced five excellent additions to our global team of client-facing managing directors, which with those additions now stand at 68. Three of them MD hires will support a significant expansion of our European business, building on our strong existing team in that region. Luca Ferrari will join David Wyles as Co-Head of our European Corporate Advisory Business. Mats Bremberg will join our long-time colleague Jacob Spens in opening an office in Stockholm with the goal of furthering our commitment to the Nordic region. And Anthony Parsons will join as a Senior Member of our Team focused on the UK. In New York, Eric Mendelsohn joins as a Managing Director focused on restructuring and financing advisory opportunities. And finally, Gavin Solotar whether join the Firm in New York as the Managing Director and General Counsel. Each of these individuals brings deep experience as well as a significant number of clients and other important relationships with them to Greenhill, and we believe each will help us continue to grow our global franchise as a leading independent advisor to clients on their most important strategic transactions. We are continuing to see interesting recruiting opportunities and would not be surprised to add a few more before the year is over, all in the context of what will be a modest increase in total headcount as Chris mentioned. We continue to be very selective in terms of who we add as we expect the many challenges facing our large bank competitors will be sending more senior talent our way again after next year end. Now, we are happy to take any questions.

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Joel Jeffrey of KBW.

Good afternoon, guys.

Hi, Joel. How are you?

Good. Just a quick question, in terms -- on the investment side, looks like in terms of the GCP II put options that they're exercisable in December. Can you just give us a little color on where you stand on those and any impact that could have on financials?

I don't think it's -- well, first of all, we don't know where we stand because it is a put, and obviously, the people who bought our stakes in the old private equity funds will make a decision as whether they want to put one or both of the investments that are involved with those. It'll have some impact on cash but wouldn't really have any impact on earnings since we mark position to market every quarter.

Okay. So it's purely in impact on cash?

Yes, it is. Yes.

Okay. And then just sticking on the cash side, it looks like in April you reduced the size of your revolver from $50 million to $45 million, and you got a lower rate for it. Just curious, given how challenging the environment has been, what was the thinking behind bringing the revolver down in terms of size?

We were more than happy to get a lower rate in exchange for a tiny reduction in the size revolver. As you've seen, we've maintain a net cash position with really very modest debt, and frankly, we just don't see the need for that sized facility going forward.

Okay. And then, lastly, in terms of thinking about the dividend, you gained -- you got about $9.2 million in cash from the Iridium sells, and you certainly had a little bit of positive cash flow from the earnings side, and in terms of your buybacks and dividend, how sustainable is this?

I think based on what we see in the business going forward, we think it's completely sustainable, both the dividend and share repurchases, at least for as far out as we can see. I have made some comments about how we see the rest of the year playing out, and obviously, we do have close to $10 million a quarter of Iridium proceeds on top of that. So we don't see any risk at all to the dividend, and in fact, as Chris said, we will be continuing to buy back stock on top of that.

Great. Thanks for taking my questions.

Thank you.

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

Hi, guys. Good afternoon.

Hi, Devin.

Just given that comment about similar to better advisory revenues for the full year, can you just give us a sense of what percentage of getting there is dependent on deals still getting announced in the coming months versus what's already been announced and is out there in the public domain?

I don't think it's really appropriate for us to go into more detail about how we see the rest of the year playing out. Obviously, what we've said, we've said with a lot of thought. You can look on our website or in the various databases that collect information and see there has been kind of a flurry of recent announcements involving us. And so that's the basis for the comment we made.

Okay. That's fine. And then on the compensation expense, higher ratio than the targeted range this quarter, but also, when we think about how you think about the comp ratio, and maybe if we think about it in the full-year context, given that comment that you made about, again, the revenues being similar to potentially even better than last year, given that fixed cost or fixed comp is roughly the same, is there anything else that would move the needle one way or the other relative to where you guys came out last year on the comp ratio?

Obviously, I do think that the best way to look and think about a comp ratio is on annual basis. And I think it's fair to say that if we end up with revenue that's similar to last year, we should end up with comp that's similar to last year. If we do a bit better than that, the comp ratio might be a little bit lower. If we end up doing worse than that, obviously, it could be a little bit higher. And obviously, you have to factor in the impact of the principal investments as well, which last year was a bit negative and so far this year it's been positive. But those are the factors in the mix.

Got it. Okay. Thanks very much.

Thank you.

The next question comes from Alex Blostein of Goldman Sachs.

Thanks, guys. Good afternoon.

Good afternoon.

I wanted to follow up, Scott, on your comments, again, around the advisory revenue. So it looks like, at least from the data, that we can see the backlog is still pretty thin into the third quarter. Clearly lots of big deals that seem like are going to close in the fourth quarter. Is it the right way of thinking about there's other things going on behind the scene that we just haven't seen yet that give you confidence around your commentary on advisory revenues being flat to up this year?

Yes, I would say there's clearly a lot of value in things that have been announced recently for us, but clearly there are other things as well that we are working on that we're expecting will come to fruition well before year-end.

Okay. And then I think the past you guys talked a little bit more about the composition of advisory business between restructuring and fund placement and the pure M&A advisory. Can you give us a little more color on what that looks like in the second quarter or maybe year to date?

I always think a quarter is such a short period of time to think about the kind of thing, but I would say it's -- the fund placement business is kind of similar to what it was last year. It probably, honestly, the first half looks very, very similar to what it did last year in a transaction type or a revenue type. By revenue type, I mean retainers versus completion versus announcement versus fund placement. By transaction type, M&A versus restructuring, etc. It all looks quite a lot like last year, the one difference being geographic where, as we said, there has been quite pickup in Europe offsetting a decline in Australia, with North America about the same.

Got it. And then the last one for me is on the head count and the recent hires you guys just made. So dynamics in Europe for the market broadly remain, obviously, pretty challenging. The activity out of Europe for you guys has picked up I guess, but for the market overall, it remains pretty soft. Can you maybe help us understand a little bit more around the timing of the hires in Europe given the backdrop for traditional M&A there is probably a little less robust than maybe in some other regions. And then do you think it makes sense to wait more before committing to hires given that investment might take a little bit longer to pay off?

I would say that what drove those hires is really the unique quality of the people. And I think almost, no matter what the environment, we would have brought people of that quality on board. Separate from that, and obviously supporting the decision, is that there is really not much question we're going to see -- we've seen a material pickup in revenue from European clients year-to-date, and we've got some interesting things we're working on. So we actually -- I certainly realize that was probably not true across the board others, and Europe remains a very, very difficult place, but somehow we've managed to find a fair amount of things to do. We think there's more demand for independent advisors like ourselves and so were glad to be expanding a bit over there.

Got it. Great. Thanks.

Thank you.

The next question comes from Howard Chen of Credit Suisse.

Hi. Good afternoon, Scott. Good afternoon, Chris.

Yes, Howard, hi.

Scott, confidence appears to be the major limiting factor in getting deals across the finish line. What are you hearing from CEOs and boards in terms of what we need to see out of Europe, the US election, the fiscal cliff to maybe progress some of these transactions that have been caught up in the backlog?

I think it's is fair to say I don't hear a lot of people with respect to M&A transactions focusing on the fiscal cliff. I'm sure that impacts many other parts of our economy and the markets, but we don't seem to see it discussed a lot in terms of an impediment to M&A. Clearly, Europe, quite different from that, has caused a lot of volatility, which has not only impacted the European markets and financing markets but very much the US and elsewhere as well. So I think any kind of clarity to how things are going to play out over there clearly would be a positive for the M&A market. I think what we're maybe seeing in recent weeks, as I said, clearly, there have been some for announcements, and clearly, we benefited from that. Maybe it's just simply in some cases that companies have important strategic priorities and they're just not going to wait around forever before they pursue them. I suspect that's case in some of the things that we're working on.

Great, thanks. And maybe just another follow-up on your most likely scenario, the 2012 advisory revenues end up higher than '11. So the simple math is, back half quarters would average like $92 million a quarter to be above the back half of -- to be above last year. How much do you have -- how much to think of that figure as locked in and fixed given retainers and other deals that you think are highly confident that you have a closing and a fee in?

As I said a minute ago, I really -- we obviously wanted to give people. We are seeing some interesting trends in our business that we wanted to notify our investors of as part of this announcement, but I don't think it's appropriate for me to go further and try to break things down individually and how it's all going to play out. Clearly, that is what we're seeing. We've seen a lot of recent announcements that help give us comfort to make that statement, and clearly, there are others. We're obviously not assuming 100% or anything remotely close to 100% probability on things we are working that they'll all get done by year end, believe me. But that -- I think the statement we made is a pretty informative one and probably about as far as we can go.

Okay, understood. Thanks for the strength of that, Scott. And then just final one, Chris. I just wanted to clarify the fixed compensation figure you said, Chris. Did you say it's roughly $130 million today?

Yes, for the base compensation of base plus RSU amortization, approximately $130 million.

And then just -- if we just annualized the second quarter compensation, it gets you to $114 million. Could you walk through a couple of the puts and takes in terms of just reversal of prior bonus accruals versus impact of new hires and departures?

No. We're not going to break that down on this call. I just don't have it in front of me. There'll be some additional disclosure in the Q.

Okay. Thanks.

Thank you.

The next question comes from Doug Sipkin of Susquehanna.

Yes. Hi, guys. Good afternoon. Two questions. You touched on it a bit, Scott, but maybe I could drill in a little further. It does seem like something is kind of happening in the M&A market in the last couple weeks, maybe the last month or so, and then, obviously, specific to you guys. Is there something else going on? I know we have always talked about the conflicts and things like that. Is that like driving incremental business for you guys right now? Or is a really just a culmination of stuff you've been working on for a bunch of months finally coming to fruition?

I think it is more of the latter. Clearly, over the last years, we've added a number of what we think are very, very good people. It takes time, especially in a difficult market, for them to really start to produce. We see the market, perhaps, falling a little bit in terms of transaction activity and that leading to more deals getting announced or closer to announcement And there's -- as you can imagine, anything you see announced is something that has been worked on for a very long time before it ever sees the light of day publicly. So there is no -- it's not like there's a big shock here to us. We know we've been very, very busy on very high quality projects, and were just suddenly in recent weeks seeing more of them come to public fruition.

Got you. Okay. And then maybe a follow-up more on the balance sheet stuff. On average, what is the difference between the cash earnings and the GAAP earnings? The reason I mention it is because it seems to be you guys do get drilled a little bit on the dividend, and there are quarters were the payout ratio is above 100% on a GAAP basis. I'm just trying to figure out -- on a cash basis, you guys -- I should say you guys never have flinched with the dividend, so I'm assuming that the cash earnings are a decent amount higher. Can you provide us, maybe, with what the delta is between -- on average between cash and GAAP?

I think you -- obviously, the original (inaudible) have one year of fairly volatile revenue business. I think if you look at our disclosure around RSU amortization, obviously, that is all non-cash. And so you can our net income. Obviously, we're not a Business with a lot of capital expenditures or something, so it's pretty much net income plus RSU amortization is what the cash earnings are of the Business. So that's why we don't -- yes, you are right. We don't feel, frankly, for the foreseeable future the slightest concern about the dividend given the earnings level, what we see developing in revenue, the non-cash portion of our cost structure, and then, of course, the liquidation of our investments.

And just final question. When do your blackout periods end for stock buybacks? Obviously, I imagine up until earnings you couldn't do anything. You have to wait until the end of the month or end of a couple of days after earnings? Just curious.

I think we probably don't want to disclose that. I think different firms have different policies. You can be sure that we have an appropriate and conservative one, but I wouldn't want to say more than that.

Okay, great. Thanks for taking my questions.

The next question comes from Michael Wong of Morningstar.

Hi. Good afternoon, guys. Just one question from me about deterioration off (inaudible) and improvement in Europe. Was it that Australia was just so abnormally high recently and it's fallen to either a decent rate a below normal rate? And for Europe, was it just the comparable prior period was abnormally low and it's just a significant increase from an abnormally low number to a somewhat normal if not subdued number. So just the revenue in Australia and Europe versus what you might think is normal?

That's a good question, and it'll be a good one to ask again at the end of the year when we have a little more data. I would say with respect to Europe, obviously, the activity has been way below what we saw, literally, for a 10-year period, from 1998 to 2007. So yes, it is rebounding off a very low level that we've talked about for the last few years. So I'm -- it's not like we're making a stunning amount of revenue over there, but it's quite materially from what had been a tough few years. So obviously, we're pleased that that's getting back toward, not to, but toward a historic level of productivity over there. In Australia, I would say after two quarters, I would just say I think it may well be nothing more than random. Clearly, there is softness in commodity markets. Clearly, there is a slowdown -- somewhat of a slowdown in China. Maybe that's impacting so some degree transaction activity in Australia, but we feel like we have a lot of great assignments and as big a market share of activity as we ever had there. And it's, obviously, over a couple of quarters, you can just randomly have less deals get announced and closed. And at this point, that's certainly we are hoping it is and could well be the case.

Okay. Thanks for that.

Okay. I think that's the last of our questions, so thank you all for your time, and we'll look forward to speaking again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.