Greenhill & Co Inc (GHL) 2016 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the Greenhill first-quarter earnings conference call.

(Operator Instructions)

Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Chris Grubb, Chief Financial Officer. Sir, please go ahead.

Thank you. Good afternoon and thank you all for joining us today for Greenhill's first-quarter 2016 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 of the firm's control and are subject to known and unknown risks, uncertainties and assumptions. The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could effect 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, Chris.

In the first quarter, we achieved a revenue of $67 million, which is 8% higher than last year's first-quarter result, despite the fact that almost none of our large pending transaction assignments got to completion in the quarter and the fact that market volatility resulted in a slow start to the year in terms of new deal announcements.

Our compensation ratio for the quarter was higher than typical, but should decline to a more normal level over the course of the year. Our non-compensation costs were lower in absolute terms than last year's run rate, as we had suggested they would be. Together, those costs resulted in a pretax profit margin of 10% for the quarter.

As always with us, those figures reflect all GAAP compensation and other costs with no pro forma exclusions. Our tax rate was lower than usual at 33%, given the regional was sufficient to pay our dividend and repurchase a modest amount of stock by means of tax withholding on restricted stock divested.

I will provide some color on the market environment, our sources of revenue, and the revenue outlook and Chris will then speak further to cost and balance sheet matters. In terms of the environment, I'm sure everyone would agree that deal activity of all kinds got off to a much slower start this year than anyone had predicted, likely because of the extraordinary volatility in stock, credit and commodity markets.

To give you some specifics on that, consider that in the first quarter, the number of announced deals globally with the size of $500 million or greater was at a level that, if the same pace continued throughout the year, would result in about a third fewer such deals than last year. For deals with the European acquire or target of that size, the first quarter pace would lead to the fewest such deals in more than 20 years and the data is similarly weak in many other markets around the world. Notwithstanding that very slow start to the year on new deal announcements, there are several positive points worth noting.

First, the market volatility has had little if any impact on our transactions that were announced last year and have continued to work through the regulatory review process. That means that the significant backlog of large pending transactions with which we entered the year remains intact. Though almost none of those transactions made it to completion in the first quarter, our expectations for a strong first half revenue result remain in place, though the final outcome will obviously depend on how much large transactions get to completion during the second quarter.

Second, the extreme market volatility of the first couple months of the year seems to have subsided, equity markets are now about flat for the year and credit markets have recovered to some degree, which should set the stage for increased deal announcement activity generally. In other words, we remain fairly optimistic about M&A activity going forward.

Just as last year we thought headlines overstated the state of the M&A market based on the small number of mega transactions, this year we think headlines are overstating the weakness of the M&A market based on the unraveling of a couple large deals and the absence of new announced mega transactions in the year to date.

Third, and most important, our own book of active transaction assignments suggest the client interest in strategic M&A activity remains strong and that should translate into more transaction announcements for our firm. And it is noteworthy that we seem to have more assignments with large fee potential today than has been the case for many years. So it is conceivable that we could have a much improved revenue outcome even with a smaller number of completed transactions.

In particular, we are seeing good opportunities in the US and in Continental Europe and the UK, though Britain's upcoming vote on leaving the European Union could impact the timing of new transactions in some cases. Particularly active sectors for M&A include healthcare and industrials, and we continue to believe that the energy sector will be important for both M&A and restructuring for the foreseeable future. With respect to our capital advisory business, the market volatility at the beginning of the year led to a very quiet quarter in terms of primary capital raising, but we still expect another solid year from that business.

Meanwhile, our secondary team at Greenhill Cogent had another strong quarter. The performance of that team has been strong and surprisingly consistent for each of the four quarters since we acquired that business and we continue to believe both that this group has great long term revenue potential and that it is an excellent cultural and strategic fit within our firm.

We recognize that much of what I have refer to is not externally visible based on public information that investors and analysts can see and that is why, with a caveat that our results are always dependent on the outcome of numerous complex transaction discussions and therefore are inherently unpredictable, we made a point in our press release of noting that external expectations for our revenue growth potential appear to have gotten to a point that was too low by a significant margin for the first quarter and also too low by a significant margin for the full year ahead.

Given our revenue expectation and the nature of our cost structure, we continue to expect significant improvement in our profit margin for the full year. And that, combined with a lower expected tax rate, gives us continued confidence in our ability to generate improved earnings and considerably more cash than necessary to maintain our dividend.

We also continue to target a flat share count relative to the time of our 2004 IPO, and it's worth noting that we are not far from that position today. The timing of share repurchases to move us further in that direction is dependent, as always, on the timing of transaction completions.

Now I will turn it over to Chris.

Thank you.

I'll now go into a bit more detail on compensation costs, non-compensation costs, tax rate, and capital management and balance sheet matters. Starting with compensation costs. Our compensation expense ratio for the quarter was 67%, higher than normal due to increased compensation relative to the first-quarter revenue level.

For the full year, we expect this ratio to decline to the level slightly lower than last year, while at the same time providing for increased compensation for our key people, assuming revenue for the year develops as we expect. If key transactions close in line with the timing publicly indicated by our clients, shareholders should see this already as of mid-year. Consistent with our historical approach, we include all GAAP compensation costs in these figures, which means that, unlike many of our peers, we include all recruiting, severance, acquisition and related personnel expenses when discussing our compensation ratio.

Moving to our non-compensation costs. Our non-comp costs were $16 million for the quarter, down slightly relative to last year, despite the addition of Greenhill Cogent related operating expenses since the start of last year's second quarter. We said last quarter that we expect our non-compensation expenses for 2016 in absolute terms to be similar to or slightly lower than last year and we continue to expect that outcome. In terms of our non-compensation expense ratio, obviously, the relatively fixed nature of our non-comp cost structure implies that this cost ratio would come down significantly at higher revenue outcomes.

Touching briefly on the tax rate, we said last quarter that we expect our tax rate to be meaningful lower in 2016 due to our outlook for increased revenue outside the US. We continue to have that expectation. While the first quarter rate was unusually low, we believe that modeling a full-year tax rate in the mid-30% range would make sense, with the caveat that the final outcome will depend on the regional sources of our revenue and related earnings for the year.

Looking at our capital management and balance sheet activity. Our dividend this quarter was again $0.45 per share. During the quarter, we repurchased approximately 300,000 shares of our common stock equivalents in settlement as tax liabilities upon vesting of restricted stock units. The timing of additional share repurchases will depend on the amount and timing of revenue this year, but as Scott said, our goal remains to return over time all the way to a flat share count relative to the time of our 2004 IPO.

We ended the quarter with cash of $56 million and a revolver balance of $55 million, again in our usual position of having a global cash balance in excess of our revolver balance. Note that during the first quarter, we again renewed our annual revolving credit agreement and we expanded our borrowing capacity to $70 million, given that we expect increased cash generation overseas and would prefer to avoid repatriation of that cash.

Also, after the quarter ended, we repaid the remaining $11.25 million of the first tranche of the term loan related to our Cogent acquisition last year. One last item to note is that for accounting purposes, we will likely soon take a write-down on our Australian subsidiary balance sheet of the goodwill associated with our 2010 Australian acquisition. This move has no impact on our parent company balance sheet, our income statement or our bank credit agreement, but we wanted to provide a brief explanation to avoid any confusion when our subsidiary files it's accounts locally.

You may recall that we acquired this business for all stock in 2010 when our shares were near all-time highs and businesses like ours were valued at much higher multiples than today. So the initial headline value reflected the fact that we paid for the business in shares that were then valued at about eight times revenue. With a write-down, we will effectively be taking the value on the regional subsidiary balance sheet down to better reflect what turned out to be the real cost of the business to us, also reflecting where market valuations across the sector have moved in recent times.

This move is for local accounting purposes only and says nothing about how we see our Australian business. We continue to believe that acquisition was an important strategic move for our firm and that our timing, the deal's earn-out structure, and particularly, the use of our then highly valued stock were all good moves. And when you work through all the math, we feel like we acquired the business at a very reasonable valuation given that a significant portion of the earn-out on that acquisition was not paid and that we repurchased in the open market all the shares used in the acquisition at prices far lower than they were valued at in the acquisition.

Now let me turn it back to Scott.

In closing, I'll touch briefly on senior-level recruiting. I said in our last quarterly call that we expected to recruit several managing directors to the firm this year and that continues to be our expectation, though of course, we may end up with more or fewer than that depending on what opportunities develop. Currently, the focus of our discussions is in North America, principally in adding more industry sector specialists who will bring us both new capabilities and new relationships.

We will likely be making some hiring announcements in that regard soon. Longer term, it's worth noting that we believe that the prospects for continued senior recruiting remain good, as weak financial results and heightened regulatory uncertainty continue to pressure the big banks. There has been a lot of change in our industry in recent years, but it feels like the strategic changes occurring at European banks, as well as some regional banks and other industry participants are even greater today than they were during the height of the financial crisis.

Those changes are leading many senior advisory-focused bankers to rethink whether they are at the right place to pursue a long-term career in the advisory business. We believe, and the perspective recruits often tell us, that our focused business model, our global platform, our long history, and most importantly, our collegial culture, all make us an appealing new home to consider. And with that, we're happy to take some questions.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session.

(Operator Instructions)

Dan Paris, Goldman Sachs.

Just wanted to make sure I have the math right on the revolver. So is it right that you had drawn $40 million of the $50 million facility at the end of the year and now it's -- you've drawn $55 million of the new $70 million number. Is that the right math?

Yes, that's right. Yes.

Okay. And have the terms on the commitment changed as the interest rate increased?

Not materially. We'll file everything with the Q as we typically do, but there is no meaningful change in the terms.

Okay. And then is the plan to still repay the Cogent term debt as it comes due?

Yes. If not even a little faster. There's not that much left of it, but yes, obviously, no later than when that's due. Next payment is out in October.

Okay. Got it. And I think one of the reasons you pointed to for increasing the line was to avoid repatriation of foreign cash. Can you give us a sense of how much cash is currently abroad and what is the minimum level you are comfortable with running in the US?

I do not know if we want to really get into that detail, and I do not happen to know off the top of my head exactly which accounts the various cash is in today. But we have said on the last call, and even the ones before that, and certainly we're reiterating again today, that we do have a significant pipeline of quite large transactions and a fair number of them have a European component. So while we had, by her own admissions, throughout last year, a very challenging year in terms of revenue outside the US, this year looks quite different to us.

And we just saw ahead the fact that we could well end up building up significant cash overseas, and that we want to just increase the line a little bit to be able to essentially have an offsetting amount of debt here, the same way Apple does, but with about six fewer zeros on the balance sheet on this side.

Fair enough. Maybe just one more, if I could sneak it in a different topic. You have historically been one of the bigger cross-border advisors, at least when I look at it as a percent of your deal volume or deal count. Any thoughts that you have on the new tax inversion rules and if there's broader implications for the earnings stripping piece?

I don't think there's going to be a material impact on our business. If you look back at our entire history, there are very few inversion transactions where we had any involvement. Of course it's not like there were hundreds of them for the entire market.

There were a relatively small number of deals and there were other ones we were exploring, but companies find different ways to consolidate based on whatever opportunities are available and so this wasn't, the inversion transaction per se was not a big business for us if you want to think of it that way. There just weren't that many of them and so we do not expect a big impact from those going away.

Okay. Thanks for taking my questions.

Devin Ryan, JMP Securities.

Just a couple quick ones here. Maybe first on the comp expense and just thinking about the comp ratio. Should we think about the comp expense this quarter be about as low as it can go in the absolute in this revenue environment? I'm just curious, because if you could have flexed it more, why wouldn't you to the extent your full-year view sounds pretty positive and the comp ratio in the full year is expected to be lower than last year.

We think it is all going to get worked out over the course of the year and, as Chris noted in his written comments, perhaps even already as of next quarter, and so obviously when you're setting comp, one quarter is only a quarter and especially the first quarter of the year always isn't blended together with anything else.

You have to be mindful of how you think revenue is going to evolve over the course of the year and you have to be mindful about what level of comp does it take not just to pay people's base salaries, but to reward people and retain them. So I think, I know it looks a little high this quarter certainly in percentage terms, but I think it's going to quickly remedy itself.

Got it. Okay. Great. And then just with respect to M&A announcements, obviously get they are going to be streaky and you had a nice run at the end of last year. So maybe a little bit of a slower pocket here recently and it sounds like there's quite a bit going on behind the scenes that you alluded to. So maybe we go on another streak here soon.

I am just curious, is there anything that you would point to that has been holding back deal announcements? Has it been the backdrop or is it just more a function of the specific deals that you are working on? And then I am curious, because there is obviously a lot of other industry events that you had touched on: Brexit in Europe or just the things in the US, as well. So I am curious if there is anything you would kind of point to that you had maybe held deals back that you thought would have been announced earlier in the year?

Well look, I think there is always, as I often say, a fair amount of randomness in terms of deal timing and sometimes you can have a period -- we announced more deals in the month of December than we did in any month in our history and then in January almost no deals got announced.

There is obviously a little bit of randomness that causes things to bunch up in one month versus another, but I think if I look at the broader industry data and see how low the level of announcement activity was particularly in January and February, I think the market volatility, which I think caught everybody off guard, whether you look at hedge fund performance or what is happening at asset managers or what's happened to IPOs or what happened to high-yield financings and so on.

I mean clearly, the market volatility took a lot of people by surprise and it, I think in spaced with that kind of environment, a lot of times, companies will say, I don't need to announce that deal this week or next week. Why don't we wait and see how this pans out? And that is partly why we are feeling pretty good about things, because clearly the month of March was quite different in terms of markets and they have pretty well seemed to have largely healed themselves. Although, I would still say the credit markets are not as robust as they were, say a year ago.

Got it. Okay, that's helpful. And then just lastly on restructuring, speaking of things we can't necessarily get a great handle on from the outside, can you give any additional perspective around how mandates there are tracking? I know there's probably a little more activity, but any perspective maybe the amount of mandates today relative to a year ago. Or just some additional context we can think about how busy you are there relative to the other periods, since it is harder for us to track.

It's always hard to do that. I know some firms have taken those accounting assignments and things like, but these restructuring assignments tend to be very long in most cases. They are complicated and we have always tried not to categorize M&A versus restructuring because there's such a blending of the two. So many restructuring deals end up as M&A.

In a distressed market, many M&A deals are effectively a from of restructuring, certainly in the energy market in the time to come I think. I can tell you restructuring is busier and more active by a long shot than it was one or two or three years ago because it was pretty dead in that period with extremely low default rates and we're feeling good about that business.

This year, I think we and probably a lot of our peers, will see a lot of that in terms of increased retainers probably over the course of the year. I mean it's the nature of these things is they take a long time to close, so I suspect, even if you got signed up on a new restructuring today, most likely you're looking at a success fee that will fall in the next year. But it is a positive factor in our business right now, the increase in restructuring activity.

Got it. Great. Actually maybe just one more quick one.

With respect to China, there has been a lot of activity this year of deals coming out of China for obvious reasons. But it is clearly representing a much bigger portion of the overall M&A market. So I am curious, is that something that Greenhill can participate in? I know that historically there hasn't been a lot of activity in China, but is that a theme that you think could be a positive for Greenhill, as well?

Probably not a huge one. We have done some things about cross border between Europe, in particular, and China and some between the US and China. So yes, it has some impact, and I realized in the first quarter, there were a few more deals than typical. That was probably the one bright spot in the M&A market was out of China. But it still is a relatively small M&A market in terms of the fee opportunity that is there.

And so, as I have always said, I have no doubt eventually we will be there with some meaningful presence, but I continue to think that the opportunities are far greater in the US and Europe and Australia and Japan and Brazil, even amid its turmoil, than they are in China.

And frankly, the deal that was announced and called off in a very abrupt and unusual way was just a reminder that working with state-owned Chinese companies, or state-controlled companies, is quite different from working with a typical Fortune 500 America company. So, I don't think we want to dive headfirst into working with companies we do not have a lot of familiarity with.

Got it. Understood. Thanks, Scott. I appreciate it.

Brennan Hawken, UBS.

I actually just had a quick follow-up on the last one on comp. Just one to clarify, because I got a couple of question from investors on this. You said that you wanted to award performance in the quarter and that was why the comp ratio was higher, but can you help us understand why not wait until the revenue comes in to accrue for that? Because we are so early in the year. It's mostly just accrual anyway. It's only salaries and benefits that are going out in cash right now. I just am confused about the mechanics of it and maybe it's just that I am not understanding.

Again, I just think it is one quarter. Yes, you could do, I mean I saw what our largest competitor, Goldman Sachs, did. The revenue fell 40%, the comp bill fell 40%. So I see you can do that, but in a way, that's really understating what your real comp bill is going to be. Because if you have four identical quarters, you couldn't live with that. And frankly, I doubt they could live with compensation that low.

So we tried to set comp at a level we think was appropriate from all the perspectives, including what it takes to keep employees focused and incented, and as I said, I think it is going to quickly resolve itself and it will look pretty normal as time goes on here.

Okay. That's fair. Thanks, Scott.

And then on the, another just clarifying question. It seemed like you said that short-term debt was up $10 million. I might have not heard correctly. Really we should think about the $55 million of the current short-term revolving debt as like-for-like with the $40 million last quarter right? Am I thinking about that correctly?

That is correct. And I think that is what the other caller, I think it was Dan Paris who asked that question, just comparing the revolver draw-down at year-end versus to the first quarter and you are right. That went up about $15 million and it related exactly to this phenomenon of cash sitting overseas and wanting to have offsetting borrowings here.

Yes. Got it. The 30,000 share buyback for tax liabilities, is that something that you are, it is structurally embedded into the comp structures, and so that was a very specific event there. It seemed like you added that language very intentionally, so just wanted to clarify that. And given that you are sitting with short-term debt roughly equal to cash here at quarter-end and you like to have that as the floor and you've got this debt payment you just made. Does that mean we should temper our expectation for buybacks from here?

I think, as I said, buybacks will really track closings. I mean if we had a huge level of closings in the second quarter, you might see some buybacks, but if there toward the end of the second quarter, then likely it will be beyond that.

I still think over the course of the year, we'd see a significant opportunity and we want to buy stock back as soon as we can because it is usually cheaper to do it that way. But we will wait and just look at the exact timing of when cash comes in the door. Because you are right, we do not want to lever off and so we will manage the balance sheet accordingly.

Brennan, just to clarify, it's 300,000 shares, and I think if you look at our first-quarter call scripts going back the last couple of years, we have this language in there. Based on when the shares are awarded, the tax settlement traditionally occurs in the first quarter. So this is pretty standard (multiple speakers).

Exactly. There's tiny amounts later in the year we do not bother to put into the headlines of the beginning of the press release. But this is the time year, obviously, when a lot of stock vests for people and we, as a normal course, just do this tax withholding payment.

Okay, great. Then last one for me, just to clarify, it is a bit of a geeky accounting question here. Sorry. But the impairment that you walked through, Chris, in your prepared remarks, does that have any impact on Greenhill's book value, the book value that we will see when you report second-quarter results?

No. It doesn't impact anything that you will see looking at the parent Company financials balance sheet ratios or anything in that regard. It is purely at the subsidiary local level where those get filed.

Great.

And just to add, I think realistically, very likely neither you nor almost anybody else would have even noticed this and it really doesn't have -- it's one of these accounting things that doesn't really seem to have any substantive impact at all. But just like in the UK and other markets where people, private companies, private subsidiaries, have to file accounts, we thought there might be some local commentary on it that would filter back. So we thought we would just preempt and answer the question that you just asked which is no, it has no impact on the parent at all.

Great. Thank you.

Steven Chubak, Nomura.

Scott, the revenue guidance that you have given is pretty bullish, despite the recent declines in the public backlog. I recognize that sometimes it is difficult to get the full extent of visibility, but I'm thinking in terms of the timing for the remainder of the year, should we expect that revenue lift to begin to show up as early as 2Q and I guess more specifically, how does Brexit risk inform your view on the potential for possible delays in closings heading into the upcoming quarter?

I think pretty clearly we're signaling that you could well see a lot of this in Q2. I made the statement that I did about the first half revenue versus last year. Now obviously, we added the caveat that you never know. But if you listen to the public commentary about when various deals will close, we will see some important things happen in the second quarter.

On Brexit, just to be very clear, I don't see that as impacting any completions. I think the announcement of new deals, I mean obviously, anybody who has announced a deal put the financing in place at the time they announced it. That is the way you do these things. For a new deal that you thought you were going to announce a week before the Brexit vote and finance it two weeks after the Brexit vote, some companies may well choose to say, you know what, I don't want to have that hanging out there with the movements in currency and availability of lending, et cetera, so I'm going to wait and announce it after the Brexit vote.

I'm not at all convinced that the outcome of that vote will decide them to call off a transaction. I just think it is the kind of thing that people like to have stability in markets when they're going to get financings and so I think you would probably not want to have, say a bridge loan for example, hanging out over that vote.

Thanks, Scott. That's extremely helpful color. Maybe just switching gears to a moment and I suppose addressing the elephant in the room. There's been lots of attention paid to the risk of you guys potentially having to cut the dividend. Reassuring to see you guys commit to the dividend in the release, but given what has happened to the share price, I'm wondering whether you have considered cutting it to a level that is maybe more readily supported by the near-term earnings outlook and which theoretically would enable you to still maintain a leaving dividend yield versus the peer group.

On the dividend we just stated, when some analysts started aggressively asking the question can the dividend be maintained, we paid out about $250 million in dividends since then. That's a conversation that has gone on for several years. We've said that we're going to keep paying our dividend.

We have typically a higher profit margin than most of our peers and again our profit margin is different from most of theirs and it includes all GAAP costs. There is no other cash calls, like severance or recruiting and other things that aren't included there. So our profit is real profit.

You can add to that plus the stock we pay out as non-cash cost generates a lot of cash flow. So we've been comfortable paying the dividend. We are certainly not going to cut it just because some people think we will to create some adjustment in the yield or something like that.

We are going to keep paying it out and eventually people are going to realize after we've paid out $300 million or $350 million, or at some point along the line, people are going to say, okay, the dividend really is here to stay. We remain quite confident in that, but we understand the shares don't fully reflect that. Some might say that's an opportunity, but we'll have to let the market decide.

Great. Thank you very much. That's it for me.

Vincent Hung, Autonomous Research.

My first question is what are the Cogent revenues this quarter?

Well we don't break those out because that is all part of our capital of advisory business and even that we don't break out except once a year. But they did well, as I indicated, and they have had a remarkably consistent performance for the four quarters that we've owned that business.

On the M&A environment, can you talk about the mentality of buyers and sellers today versus, let's say, the past few quarters? Has that changed at all and do you get the sense that there's probably more of an openness to things like all-share mergers?

I think the interest, strategic interest in M& A is as high as it has been. Maybe it's even getting better. Remember last year, the business was really dominated by mega transactions that skewed the overall buying statistics.

I still think the private equity part of the M&A business is pretty slow. You do not see a lot of going private transactions driven by private equity funds. But the business of one public company buying all or a part of another public company in order to consolidate its industry continues to be quite strong and that's our outlook for the foreseeable future.

Okay. Thanks.

Okay. Thank you. And I think that's our last question, so we thank you all for joining and we will speak to you next quarter.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending. You may now disconnect your telephone lines.