Greenhill & Co Inc (GHL) 2012 Q3 法說會逐字稿

Good day and welcome to the Greenhill & Company Incorporated third-quarter earnings conference call and webcast. All participants will be in a listen-only mode.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Mr. Chris Grubb, Chief Financial Officer. Mr. Grubb, the floor is yours, sir.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's third-quarter 2012 financial results conference call. I am Chris Grubb, Greenhill's Chief Financial Officer, and joining on the call today is Scott Bok, our Chief Executive Officer. Today's call may include forward-looking statements. The 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 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 on forward-looking statements as predictions of future events. We are under no duty and we do not undertake any obligation to update or review any of these forward-looking statements after the date on which they are made, whether as result of new information, future developments or otherwise. I would now like turn the call over to Scott Bok.

Thank you, Chris. Looking first at global transaction activity, the third quarter continued the year-to-date trend with further year-over-year declines in both announced and completed transaction activity globally. Against this backdrop, we are pleased with our financial results for the third quarter, and very encouraged by the number and size of transactions we announced as a firm over the last few months, including another significant one announced earlier today. In the third quarter, we again displayed our ability to generate significant revenue from sources other than traditional M&A completion fees, with announcement fees, financing, advisory, special committee assignments, fund placement assignments, and a record level of retainer fees all contributing meaningfully. With our current backlog of announced transactions and a level of earlier stage activity we currently see in our pipeline, we continue to feel very good about how our business is performing, both in absolute terms and relative to our competitors.

Let me start with the details for the third quarter and then provide some more color on trends in the business. Our advisory revenue for the quarter was down approximately 12%, compared to the third quarter of 2011, in line with our year-to-date results, which are also down 12%, compared to 2011. Our total revenue was down only 3% on a year-to-date basis, benefiting from better performance relative to 2011 in terms of the revenue impact of our remaining principal investments. For the third quarter, our pretax profit margin was 22%, and we had earnings per share of $0.28, while on year-to-date basis, we also achieved a pretax profit margin of 22%, the same as last year, and achieved our earnings per share of $0.88, which is down slightly from $0.92 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 generally. Globally, the volume of completed M&A transactions for the first three quarters of the year was down 26%, versus the prior year.

As of mid-year, the aggregate advisory revenue for our nine large bank competitors was similarly down 25%. The few large banks that reported third-quarter results are now showing slightly smaller year-to-date declines, but we still look on track for another year of outperformance in Advisory revenue, versus our larger competitors. You will recall that this 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%. As we think about the key drivers of our strong relative performance compared to the nine large global investment banks, we believe our client focus and conflict-free advisory model continues to differentiate us.

The inherent advantages of our pure advisory strategy enable us to attract both new clients and talented bankers away from our large competitors. Building on this advantage, we continue to focus on achieving a truly global advisory business, that is diversified by geography, by industry sector, and by type of advice. In terms of geographic diversity, North America, and specifically the US M&A business, has been the strongest performer by far this year. We've seen some improvement in our revenue from European clients despite the continuing economic and market challenges there, but as we have said before, that improvement is off a very low base from the last few years. Australia is down meaningfully, consistent with weak domestic M&A market trends locally, following a very strong couple of years in that market.

By industry, we are showing good breadth. As listed in our press release, we completed nine transactions in the third quarter across a range of industries, and this industry breadth, combined with what we showed in the first two quarters, also reflects the range of industries that are active in our pipeline of ongoing advisory assignments. Specifically, industrials, healthcare and energy are all quite active and technology is making a greater contribution for us this year than historically. In contrast, financial services continues to look relatively weak this year. Lastly, in terms of assignment type, as noted above, M&A in the US is making a strong contribution, with revenue from higher-probability sell-side roles outweighing buy-sides by a significant margin. The contribution from financing, advisory and restructuring roles is up meaningfully, particularly in Europe. The capital advisory or fund placement business is showing some encouraging signs, relative to what had been very difficult market conditions, with its revenue this year looking even more fourth-quarter weighted than usual.

The foregoing comments relate to our performance relative to the market and relative to our competitors, but let me add a few comments on current market activity and our performance in absolute terms as well. On the last call, I signaled what I believed was the turning point in our level of activity, and since that call, our transaction announcements have played out essentially as we expected then. Meanwhile, the dearth of transaction announcements in the market demonstrates that our increased activity, as a result of continuing market share gains, rather than a broad improvement in the macroenvironment. Having now seen those announcements come to fruition, our outlook for full-year advisory revenue is usually unchanged from our comments of three months ago. We noted then that there was a range of possible outcomes, depending primarily on the timing of transaction completions, and I'm sure everyone recognizes that the timing of such closing is inevitably both unpredictable and outside our control.

But subject to those caveats, our most likely scenario remains that we should achieve full-year advisory revenue very similar to last year. One thing we can say for certain is that our revenue pipeline from announced and pending transactions for next year is already better than it was, even on January 1, when we entered this year. On top of the announced transactions, the fact that we achieved a record level of retainer fees in the third quarter is evidence that there remains a lot of work in progress, which bodes well for our ability to build up that revenue pipeline further, as we work toward year-end. Any slippage in terms of the timing of completions currently expected for this year while likely only mean that the announced backlog entry next year will be even better.

In sum, we continue to feel very good about developments in our business. It is more clear than ever that clients have increasing concerns with the conflicting interests that are inherent in the universal bank model and thus are turning to firms like ours for independent advice on a variety of matters. At the only major 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 now has nearly 17 years of building a brand, we are well-positioned to benefit from that continuing trend. Now, I'll turn it back to Chris.

Thank you, Scott. I'm going to cover four major topics today. Compensation costs, non-compensation costs, dividend and the share repurchases, and finally, we will provide an update on the continuing liquidation of our remaining principal investments. Let me start with compensation. As we have commented previously, our goal is to achieve a compensation ratio that is the lowest among our close peers, and consistent with our early years as a public company, driven by revenue productivity per employee as the best among our peers. Given the continued challenging transaction environment, our productivity per employee has remained under pressure, and as a result, in the third quarter and on a year-to-date basis, we had a 53% ratio of compensation to revenue, which is above our targeted level.

While our year-to-date earnings announcement suggests that our ratio will be by far below its GAAP compensation ratio of our closest peers, we are also quite focused on the absolute level. Our objective is to drive this ratio lower over time, as the overall transaction environment and our resulting revenue productivity improves towards historic levels. To provide updates on some statistics we have previously discussed on these calls, following the recent recruiting we have announced, we expect our headcount will be up around 5% by year-end versus prior year, and despite that growth, 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.

Turning to non-compensation costs, our third-quarter non-comp costs were $15.5 million, a significant decrease from the first quarter, and approximately flat with the second quarter of 2012. Year-to-date, our costs are unchanged from last year. There are obviously some differences each quarter, but consistent with our comments on previous quarterly calls, we do not expect the full-year non-comp expense for 2012 to be up meaningfully, if at all over 2011 levels. On the topic of dividends and share repurchases, our dividend this quarter was $0.45 per share, consistent with the last few years.

During the quarter, we also repurchased 508,000 shares of our common stock at an average cost of $39.32 per share, for a total cost of $20 million. During the first three quarters of this year, we've repurchased over 1 million shares, for a total cost of just over $40 million, so while we pay a significant dividend, a dividend actually represents only about half of the cash we have returned to shareholders this year. It's important to know, 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 $38.1 million and debt of $35.4 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 just under $60 million remains available. We plan to continue our open market repurchases in the fourth quarter, with the amount of such repurchases dependent on our earnings, as well as on the results of the continuing liquidation of our investment portfolio.

Finally, let me touch on remaining principal investments. Our principal investments generated a third-quarter loss of $10 million, driven by a mark-to-market loss from a decline in Iridium share price during the quarter, bringing our year-to-date gain on the principal investment portfolio down to $1.6 million. In previous calls, we explained that 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 third quarter, we sold 1 million shares at an average price of $8.24 per share, for total proceeds in excess of $8.2 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 third quarter with investments valued at $92.5 million, which includes both our limited partner investments and our previously sponsored funds of $49 million and our remaining Iridium stake, valued at approximately $43.5 million. Now, let me turn it back to Scott.

I'd like to close by talking about some personnel developments, particularly two focused on the healthcare sector, which has been a very important one for us. We recently announced that we had hired Jeffrey Wasserstein, who had held a number of senior business development and commercial roles with pharmaceutical companies, as a managing director to be based in New York. This morning, we announced the addition of Rupert Hill, who was previously Head of Healthcare for both Europe and Asia-Pacific region at Bank of America -- Merrill Lynch. He will be based in London. Jeff and Rupert join our already-strong global healthcare team, and bring with them an extensive list of client relationships around the world.

During the third quarter we also announced the hiring of two senior advisors in Germany. They will focus on expanding the firm's client relationships in Germany, working with our teams based in Frankfurt and London. We are continuing to see new and interesting recruiting opportunities, driven by the many challenges facing our large bank competitors. We plan to continue opportunistically hiring talented bankers that we believe can contribute to our long-term growth, while remaining highly selective on each hire, and staying conservative in terms of overall headcount growth. With that, we are happy to take any questions.

(Operator Instructions)

The first question we have comes from Howard Chen of Credit Suisse. Please go ahead.

Scott, as we build up to year-end, many in the investment community seem focused on the policy risk outstanding, most notably the US election and the fiscal cliff. Just curious what you're hearing from corporate boards regarding those policy risks and how that might be affecting strategic decision-making?

Personally we are still not seeing that as a huge factor, and I think I've been pretty consistent saying that at various conferences. I think Europe has been a big overhang on market activity, but I don't think people are as focused on, at least in terms of M&A, strategic M&A opportunities, on the fiscal cliff and certainly as you are seeing with our string of announcements, our business frankly seems to be accelerating right out into the eve of this fiscal cliff. So far, so good on that. Although frankly, I hope they find a way to resolve it, add that on a personal level.

All right, thanks Scott, great. You mentioned in your prepared remarks a record level of retainers this quarter. Just hoping maybe you can provide more color, how much of overall revenues that represented would be helpful.

I don't want to get quite that specific about it, just because frankly I think it is somewhat competitive information, in the way we do certain things. But what's positive about it, first of all, is it is more than we've ever had, and secondly, it tends to be fairly sticky quarter-to-quarter so it is not like it is sort of usually volatile. It certainly it's really quite granular, made up of lots and lots of small fees, some of which are one-time and some of which are recurring. But we are certainly pleased that we seem to be getting more and more strategic advisory relationships, where that becomes part of the conversation.

Okay, understood. Finally for me, if we look at the transactions that have been recently announced, they seem bent towards sell-side mandates. Does that suggest anything to you on either the state of the market for the state of the Greenhill franchise? Is there any sort of conscious effort of what you and the team have been trying to build?

I wouldn't say this is really a conscious effort, but it certainly is a positive thing. We love to have our important clients, buy-side as well as sell-side roles. It seems like we are getting more of the very attractive sell-side roles, where the probability of a positive outcome is really very high. That's a good thing, and I think it is probably just a sign of the franchise continuing to mature.

Okay, thanks for taking the questions.

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

Just given the comment in the release, that the timing of deal closings will impact the full-year advisory revenues, that seems pretty obvious. But just without getting into specifics, have been any significant deals where the closing dates have changed from maybe what you had originally expected within the last few months? I'm just trying to understand why that was put out there?

It was only put out there, because you're absolutely right, it is a completely obvious point, and as you start to talk about how one quarter looks versus how a half-year looks, clearly you have to be cognizant of the fact that closings do drive revenue. But I wouldn't read anything more than was literally written in the announcement. We are not hinting at something, we are not warning about something. Things are progressing, as I said, pretty much as we expected on our call three months ago. Still, as I said, our outlook for the year is unchanged from what we said, but clearly, whatever final number we get to is going to be determined by what falls in the last week of December, what falls in the first week of January.

Got it. Just wanted to understand that. Okay, great. Then once again this quarter, your advisory revenues appeared to be much higher than what could be gathered from, at least what's out there in the public domain from the press reports, data sources, your website, everything put together. So just love to get any more color if you can provide it, just on the mix of advisory revenues or just some of the drivers within advisory would be helpful.

As we always do, I think, in our full-year press release, we will try to break things down in a little more granular detail with real specific numbers. But I think in general, all I can say is frankly, we are just getting called upon for a much wider variety of types of assignments, and some are financing-oriented and some are restructuring-oriented and clearly fund placements is a business that's growing for us. Some are assignments for roles that frankly, I never would've thought we would get involved in. We talk about government roles as well, so it is a wide variety of things, and I think a real sign of the fact that the breadth of our business is growing, along with the roster of senior partners we have and the trend toward using firms like ours.

Okay. And just lastly, you mentioned that Europe is starting to see some improvement, and we're clearly coming from a depressed level. I'd love to get your thoughts essentially, when you think about the potential for European Advisory activity, do you see a scenario where there could be a pretty steep ramp-back to maybe more normal levels, or do you expect that M&A and advisory activity over there is going to be more of a slower recovery, as their economies potentially struggle along?

Obviously, this is a little bit in the realm of a guess, but I think when it comes, it could be fairly steep. I think if you look at our US business, I think, look at the announcements we have made in the last few months, it is about as good a three or four month string of announcements as we probably had since 2007 or early 2008 for the US. I think at the right time, I don't know when that is, I don't know if that's tomorrow or 6 months or 12 months from now or longer, but I do think these cycles tend to go that way, where there's a degree of stability, people start being willing to take a little bit more risk strategically and suddenly you find a bunch of things start happening.

Okay. Great, thanks for the color. Appreciate it, Scott.

The next question we have comes from Alex Blostein of Goldman Sachs.

Want to spend a minute on the advisory business, and when you look at your activity versus activity at some of your other peers, both on the independent side also but also in the bulge bracket. Clearly, the numbers stand out, and I was just wondering if you could spend a minute to talk about why you think that is, whether or not it is the impact of some of the new hires you have made or particular industry sectors and verticals that you participate maybe more actively? But is it just feels like the disconnect has been pretty wide, and I was hoping to get a little more color on that.

I think you're right, that's our sense of the disconnect between what we are doing and what some others are doing right now as well, particularly the big banks, but probably some of the independent the ones as well. I think it is as simple as this. In 2008, 2009, 2010, we hired huge number of people. I think on the day Bear Stearns was sold, we something like 28 managing directors, and now we have something like 70, so it was a huge ramp up we had. And it is not all that many people we hired in the a lot last few months, it is a lot we hired 1.5, 2.5, 3.5 years ago. And those people have been here and been working with our clients on the Greenhill platform, and with the Greenhill colleagues long enough that it just seems like their labors are starting to bear fruit. I don't think it is any more complicated than that. It is quite diverse. A lot of different sectors. A number of different regional offices around the US, where it is benefiting us to be in different places. Clearly, the fund placement is starting to play a role. I think we've collectively taught each other within the partnership that there's more than we can do than just M&A so we find ourselves doing more financing-relating assignments. I think this is just the proof of a lot of recruiting during the financial crisis.

Got it, that's helpful. And then I guess when you look at comp and you have been pretty good keeping the overall numbers in check on the comp side, but assuming that this year plays out how you thought, with flattish advisory revenues, you did make some hires during the year, how should we think about total dollar comp from a dollar perspective on a full-year basis?

I think you can look at what we've done for the three quarters, and also what we did last year as a bit of a guidepost. We've said that the non-comp costs are going to be very similar to last year, if for example, the revenue turned out to be like last year, it wouldn't surprise me if the comp turned out to be a lot like last year as well, notwithstanding some hires, we have not added huge amount of headcount, as you can tell. So I think we are kind of on a similar track to last year. If we end up a lot better than that on revenue, we might do a percentage of comps. If we end up worse, maybe it's a little bit higher, but I think last year and the first few quarters of this year is a pretty good guidepost.

Got it, great, thanks so much.

The next question we have comes from Brennan Hawken, UBS.

Just a quick question following up on Howard's point on the deal environment. It was interesting to hear about no impact from fiscal cliff. Have you seen any meaningful change in buyer-seller attitudes since the central bank actions that were announced?

I don't think anything I really could identify. Most of the transactions we work on are one public company doing something with another, and yes, financing plays a role, but not a lot of them are highly-levered transactions. Some of the things we do, and some even that we've announced recently are private-equity oriented, where we are selling to a private equity fund for example, and clearly, that kind of deal is going to be helped by in an easier financing environment. Probably there's been some impact, but to me, it is just a lot of companies have strategic desires or needs, whatever you want to call them, and they've been reluctant to move for a long time, and it seems a lot of people are getting a little more encouraged to pursue that strategic opportunity right around now.

Okay. Than how about generally the hiring environment as we approach year-end. Is there any color that you could add on that? Are you seeing any increased interest, particularly given continued trouble around the bulge bracket jobs?

Yes, I would say that really, we switched back to a very positive recruiting environment, I would say maybe in the spring of this year, when I think bankers got the sense that this was going to be another very tough year at the big banks, and I think now many have concluded it is going to be very tough many years at the big banks. It is been improving, I would say, through recent months, and not very long passes before another new very attractive recruit shows up on our doorstep and wants to talk. We've got plenty of folks who we are talking to. As I said, we are going to continue to be very selective, not like it's going to be a mass hiring or something, but we're really excited about the people who joined recently, and we are really excited about some of the people we are still talking to.

Okay. That's great. Then the last one for me, is there a minimum level of revenue growth, given your current staffing levels and recent investments that you've made, that is necessary for you to hit your comp ratio targets?

Clearly for us to get back to where we were for many years, which is well below 50%, we need more than $1 million revenue per employee, which is where we have been on average through the financial crisis and it's not different from that right now. I'd like to think that with all the announcements we are seeing, that better days lie ahead, and clearly, it is going to get somewhat better before we can go to south of the 50% number. But I don't think it needs to double or something like that, but clearly it needs to move in a positive direction. Hopefully we are seeing the beginning signs of that.

Okay, thanks for the color.

Next we have Joel Jeffrey of KBW. Please go ahead.

I apologize if I missed this earlier, but what was the exact reason that the fund placement business might be a little bit more back-end loaded toward the fourth quarter?

I think this is a really simplistic outsider view. That business has a lot of meetings, but a simplistic view would be that a lot of big institutions like pension funds decide their allocations early in the year, and if you're the guy who invests in custom private equity funds, you get a certain allocation for that year. I think they tend to look at a lot of things throughout the year, and I think toward the end of the year, they tend to pull the trigger and sign commitments. That's a little simplistic but I think that really seems to track what happens.

I know you closed a few of those deals this quarter, but is the back-end load similar to what we saw last year in terms of magnitude, or is this even anything greater than that?

Probably a little better than that. The positive is -- the negative is, this has been a very tough environment in that business, even for the last few years. The positive is, it does feel in the last few months like it is improving meaningfully. Some of that will play out, we think, in the next few months, and hopefully a lot of that plays out next year as well, but it feels like consistent with public markets, consistent with M&A market that institutions are maybe more willing to make long-term investment commitments.

Great. In terms of where you are seeing strength and weaknesses geographically, in the past you talked a little bit about strength in Japan. Are you still seeing that, or is that dried up at this point?

No, there's a lot of interest, and certainly we've seen some deals we are not involved with, the Softbank deal is a great example of Japanese interest in the rest of the world, the pending Dentsu Aegis deal that we just worked on between the Japan and UK is another good example. We are still very active and very excited about that business. It's a relatively small office, so I don't mention it as much as I do Australia, where we have lots more people, let alone Europe or the US. We are hopeful, but it is not an easy market. It probably won't be for long time. There are challenging cultural issues to getting a big cross-border deal done out of there, but we are still quite positive, as I think many others are, on the outlook for Japan M&A.

Okay, great. Just lastly, in terms of the Iridium shares, if you can give us the break down between what the realized gain and loss was on the sales that you made, versus the marks on the portfolio would be helpful.

I don't have that offhand, but we'd be happy to get you that directly. I don't think it is terribly material how much fell into which camp, but we can get that to you, Joel.

Great, thanks for taking my questions.

Next we have Douglas Sipkin of Susquehanna.

This is [Justin] calling in for Doug. Just one question for you. Just going back to comp. I know you already spoke about what to expect for 2012, but what if you can give a little insight or outlook on what to expect for fixed comp going into 2013?

That's too early to say, it really is. Clearly, it is driven in part by salaries, and given the modest increase in accounts, I wouldn't expect a dramatic change there, and part of it is driven by restricted stock amortization, and clearly that will be impacted by how much we pay people at the end of the year, so we will give an indication of that on the fourth-quarter call, but I really wouldn't know how to give you any guidance at this point.

Okay, thank you very much.

The next question we have comes from Michael Wong of Morningstar.

Quick question on comp again, considering your relatively strong backlog, will your 4Q comp ratio take into account your total backlog and related expected fees, or just the revenue that you'll book by the end of 2012?

That's a good question. It's a subtle point probably a lot of people don't get. We pay based on results. We are not -- if you have the concern we are going to pay people a lot of money for deals that are going to close the first or second quarter, I wouldn't be concerned about that. We are more focused on aligning actual compensation with actual revenue.

Okay, that's as good. Thank you.

It appears we have no further questions at this time. We will go ahead and conclude our question-and-answer session. Our knowledge to the conference back over to management for any closing remarks. Gentlemen?

Okay, all we have to say is thank you all for joining, and we will see you again in a few months. Goodbye.

Take care, sir, and we thank you and the rest of management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may now disconnect your lines. Thank you and have a nice day.