Greenhill & Co Inc (GHL) 2016 Q4 法說會逐字稿

Good day everyone and welcome to the Greenhill and Company Inc fourth-quarter earnings call and webcast.

(Operator Instructions)

Please also note that today's event is being recorded.

At this time I'd like to turn the conference call over to Mr. David Trone, Director of Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good afternoon and thank you all for joining us today for Greenhill's fourth-quarter 2016 financial results conference call. I am David Trone, Greenhill's Director of Investor Relations 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 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 (technical difficulty) current reports on form 8-K. Either 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're under no obligation to update any of these forward-looking statements after the date on which they are made. I will now turn the call over to Scott Bok.

Thank you, David. We finished the year strong with fourth-quarter revenue of $101.6 million, up 34% from the prior-year. For the full year we achieved revenue of $335.5 million, up 28 % from the prior-year.

Our compensation ratio was 52% for the fourth quarter and 54% for the full year, down 2 points compared to 56% last year. Our non-compensation expenses for the fourth quarter and full-year were down meaningfully in absolute terms resulting in a significantly lower cost ratio.

Together higher revenue, combined with lower cost ratios, result in a pretax profit margin of 32% for the fourth quarter and 26% for the full year. As is typical with us, and in contrast to our peer group, all those figures reflect all GAAP compensation and other costs with no pro forma exclusions.

Our effective tax rate was 27% for the fourth quarter and 31% for the full year. In both cases, well below last year's levels as a result of increased foreign income and lower tax rate jurisdictions. Our earnings per share with $0.74 for the fourth quarter and $1.89 for the full year, both more than double last year's levels. In every respect our results for the quarter and year were consistent with, or better than what we had indicated to investors throughout the year.

Now we will go into a bit more detail on revenue, costs, capital management, and the outlook. With respect to revenue, 2016 was a very good year for us by any measure. First, our 29% annual growth and advisory revenue came despite a decline in global transaction activity and a record year for deal failures.

Second, our strong revenue growth compares very favorably to what public reports suggest is around 5% aggregate decline in advisory revenue for our full public competitor group. In fact, ours is likely to be the highest, or second highest, annual growth rate of any of the 15 firms that publicly report an advisory revenue figure.

Our market share gain in 2016 follows a long history of the same, demonstrated by the fact that over the 17 years of data available, our advisory revenue has tripled compared to the largest advisory firm, Goldman Sachs, and more than doubled versus largest independent advisory firm, Lazard.

Third, our 2016 revenue performance demonstrates the breadth and diversity of our revenue sources as strength primarily in our US and UK M&A businesses overcame very modest revenue contributions from Australia, Latin America, and Japan. The fact that foreign currency fees translated into fewer US dollars given the strength of that currency, and a small decline in revenue from Capital Advisory, which was more impacted by recurring market volatility throughout the year than our M&A business was.

And fourth, our revenue performance demonstrates the value of our global network and our culture of teamwork, as more than 40% of our revenue came from cross border transactions.

With respect to cost and profitability 2016 was also very good year for us. Or 26% pretax profit margin was the best in several years and the seventh time in the past 10 years we have achieved at least a 25% margin on a GAAP basis. A level that only one of our peers has ever reported and that was in only a single year.

Turning to capital management it is worth noting the completion of another year of a strong dividend policy, which today provides shareholders with about a 6.25% yield. If you use as a simple measure of cash flow, the sum of our net income and the non-cash portion of our GAAP compensation, we spent 58% of that cash flow on our dividend last year.

In the years since M&A activity sharply declined at the start of the financial crisis in 2008, our dividend required only accumulative 62% of that cash flow and that is why we remain comfortable with our dividend policy and thereby paid out more than $500 million in dividends over that time.

On top of maintaining our dividend, we repurchased 264,000 shares in the fourth quarter and 1.2 million shares, or share equivalents for the full year. As a result, our track record of having a share count almost unchanged from the day after we went public nearly 13 years ago, remains intact and sharply differentiates us from our peer group.

Despite the dividend and share repurchases, we ended the year with a strong balance sheet with significantly more cash than last year end and with the cash balance in excess of our total debt. For 2017 our board has authorized up to $75 million of share repurchases.

Another topic related to capital management is the earnout on our acquisition of coaching partners as we approach its second anniversary at the end of the current quarter. As our press release notes, this business needs a stronger than typical revenue result in the current quarter, despite the fact that the first quarter is historically a lower revenue quarter than average, in order to achieve the earnout on the first of two tries that are provided for it in the acquisition agreements.

If the earnout is achieved, we have multiple alternatives for funding the resulting $18.9 million cash payment including cash and/or additional bank borrowings. If revenue falls slightly short there's a second chance to achieve the earnout after two more years.

The last topic we're touching on in relation to capital management is the prospect of a reduction of the US corporate tax rate. If the rate were to be reduced to a level in the range of the possibilities being discussed in Washington, we would not only benefit from significantly higher earnings and cash flow, but we could bring significant cash from overseas to the US with little or no tax leakage in order to reduce debt and/or increase returns of capital to shareholders.

Looking ahead to 2017 we expect a strong start to the year in revenue terms. With respect to the full year ahead, based on what we can see internally, client dialogs regarding M&A continue to be strong in the US and UK, we expect a better year than last year in Australia, Japan, and Latin America, and we expect to do better than last year in restructuring advisory.

Assuming reasonably stable markets, we also expect to generate more revenue in both the primary and secondary Capital Advisory businesses. For this year and beyond our largest potential source of revenue outside is probably Europe, given the fact that we have a strong brand presence there and in 2016 the number of transactions, $500 million or greater in size, fell to level now 54% below its 2007 peak.

When Europe returns to its historic place of having an M&A market comparable to the size of the US market, clearly we should happily benefit. Separately, with respect to this year and beyond, we also believe the regulatory and tax changes proposed by our new president, should add further momentum to transaction activity in the US and perhaps elsewhere around the world if economic growth accelerates, as many commentators currently expect.

With respect to costs in 2017, our compensation ratio will likely be similar to the level in 2016 with the ultimate figure a function of our revenue level as well as the amount of recruiting we accomplished. On the non-compensation cost side we expect our 2017 costs in absolute dollars to be similar to what they were in 2016 which was $6 million below where they had been in 2015. With respect to taxes, we expect an effective rate in the low to mid-30% range before any impact from a reduction in the US corporate tax rate.

Looking further out we're focused on continuing to grow the Firm in three directions: more geographic coverage, more industry sector coverage and more types of advisory services offered. We recruited six Managing Directors from outside the firm last year, and based on the status of current discussions expect to recruit more, perhaps substantially more, in 2017.

In addition, as noted in our press release, we promoted six client facing [bankers] to Managing Director earlier this month. Several of our top performers among Managing Directors of 2016, were people who came up through the ranks starting as long as almost 20 years ago and we expect that homegrown group to be an increasingly important part of our senior talent group going forward.

With the promotions announced today that we are at 73 client facing Managing Directors, about 1/3 of whom have been with the Firm at least 10 years, and a substantial majority of whom have been with us for at least 5 years. Finally, as we look ahead to the future, it's worth noting that analysts seem to have repeatedly underestimated the continuing strength and diversity of our business.

Our fourth quarter earnings per share was more than 100% above where consensus estimates stood a month before that quarter began and were 10 times higher than the lowest estimate at that time. Similarly our third-quarter EPS results were 37% above where consensus estimates stood a month before that quarter began and our second quarter results were 51% about where consensus estimates stood a month before that quarter began.

Clearly we are generating revenue from our client base in ways that may not be visible to, or accurately measured by external databases. Our goal as we continue to develop and expand our business, is to further grow and diversify our sources of revenue for continued strong performance over the long-term.

With that, I'm happy to take questions.

(Operator Instructions)

Brennan Hawken, UBS.

Good afternoon. Thanks. One question just generally on recruiting. How are you feeling about the recruiting picture here next year? It seems like there is a pretty decent amount of optimism among some of the larger banks.

Do you think that that is going to maybe slow the opportunity for recruiting, or do you think that the idea that we could get M&A going and you feel like you've gotten more momentum at your Firm here would allow for, and make Greenhill a more attractive place and you'll actually be able to recruit a greater amount than last year?

In general, my comment about recruiting is based on very their specific discussions with specific individuals at this point, all of whom received today's press release a few minutes and hopefully were further encouraged to join us. But in general terms, there is no doubt the big banks are looking better than they were in October. Had a good quarter for trading revenue and so on.

But I still think there will be a significant flow of M&A bankers who decide that notwithstanding that, they would rather be at a Firm like ours. So, we think -- and there are just so many specific circumstances in every bank where somebody loses out on a political battle, somebody else gets the head of the group job, or wherever it may be. Where there's just a constant movement of people as I'm sure you realize at all firms. I think we can benefit from that.

Okay. That's fair. Then getting to the point on revenues becoming trickier to see using traditional methods and databases, that's a really fair point. Can you maybe point us to what you think might be a better indicator or, I know that you guys have been really pleased with the Cogent transaction. They're really close to the earnout as you referenced in your comments.

Is that a larger contributor than in the past and is that what is causing some of the difficulty? And if it is, maybe is that something that you guys might break out and disclose as its own line item on a go forward?

It's definitely not that issue at all. As note in the press release and in the comments, in fact having been a little bit ahead of the run rate to achieve the earnouts, they are actually slightly behind.

In general, it ended up being somewhat of a slightly down year for Capital Advisor, both primary and secondary as I note in the release. So it's not like we got a surprising amount of revenue from those areas. In fact, those were more impacted, as I said, by Brexit and other volatility related things in the M&A business was.

So, I think, frankly, where we made a lot of our money, a very, very large amount of our money last year was the good old-fashioned M&A business in the US and UK. I don't know why the databases maybe don't get that right.

I think -- look they certainly don't track restructuring as much as they do M&A and within M&A it's possible they are underestimating the roles we're playing or the fees we're getting. But unfortunately, there's no easy answer for you.

We're making it right in the absolute core business of M&A. And I think, at least from what I see translated from databases to analyst reports, I think people are not seeing everything that we're doing.

Okay. That's fair. And then, last one. On that Cogent earnout, just a clarification question. I believe I read in the queue that that is an $80 million target over a two-year period, right?

And I think you referenced this in your comments, too, where there's a one 2-year window that's this April and then the next is basically two years after that? Do I have the right?

You have that exactly right. They get two shots at getting to the $80 million level, or $10 million a quarter average level, for eight quarters and that is exactly right.

Okay. Great. Thanks for the color, Scott.

Thank you.

Devin Ryan, JMP Securities.

Good afternoon Scott, how are you?

Good, how are you Devin?

Doing well. So, just on the broader picture for M&A. Obviously there's this discussion in the market around activity getting us in air pockets, just as expectations need to be recalibrated. It doesn't really seem to be happening in volumes to start this year. So, just trying to think about timing of announcements and when you look at your backlog and the clients you are speaking with you.

How much to you see all of the developments in DC impacting timing, if at all? And then, I know I know it's not the same across every sector. So if you can, just give a little bit of flavor of maybe what sectors seem to be perking up little bit or if there are any areas that maybe hurt in your opinion just given what's going on?

I think in general the change of administration has been seen as a very pro-business kind of shift in terms of economic, and fiscal, and regulatory policy in the US. I think it has caused the so-called animal spirits to begin to be unleashed, and I think companies are feeling pretty positive about the future and I think they are feeling in the mood to sort of do things that will strategically expand their business.

I won't say that all these changes are going to affect everybody equally. Certainly some companies will be impacted in a different way than others. But I think in a lot of different sectors the people we talked to seem pretty optimistic about what's happening, even though the details of it certainly haven't been either unveiled or implemented at this point.

But I don't get the sense people are waiting around to see what is going to happen. I certainly don't have that sense.

Likewise in the UK where you have the uncertainty about Brexit that could, in terms of the details of how it's implemented, could be a multi-year thing to see how that unfolds. But we also don't get the sense that people are sitting on their hands waiting for the details to come out there.

It just feels to us, at least, like their is certainly a shift in terms of pro-business mood. Obviously you're seeing that reflected in a very robust stock market seemingly day after day. I think some of the same enthusiasm driving that is what we're hearing people talk about in strategic dialogues.

Okay, that's helpful. Then with respect to the outlook for restructuring, just given that improved business confidence. Are new mandates slowing significantly, or is that the expectation in 2017, but maybe that's offset by a better M&A backdrop than was the anticipated? Trying to think through how that business gets impacted.

We're feeling pretty positive, and I said I think we'll make more money in restructuring advisory in 2017 than 2016. These tend to be long-tailed assignments, as you know. A lot of the things that generate revenue for us certainly the first half, in some cases even throughout the year, are going to be things that we started quite a while ago.

But we're also seeing a fair number of new mandate possibilities. As was said a few minutes ago, it's not like every sector is being impacted by changes similarly.

We have seen interest rates move up little bit. I think that could have an impact on some companies. We're feeling reasonably positive about both M&A and restructuring, although I will grant you that we are all going to learn a lot more about what's going to happen with the economic policy and then with the economy as the weeks and months unfold here.

Got it. The last one around the outlook, I know probably can't get too specific. But just thinking through the context of people have under appreciated the revenues over the back half of last year, and here we are into 2017 and the data sources are what they are. But the expectation is for a much stronger start to 2017 than 2016.

I know the bar was maybe low from the beginning of the first quarter of 2016. As far as you can see into 2017 based on the backdrop you see today, is the expectation that if you look at maybe the first half, which you have probably have some visibility into the first half of the year, that that could look quite a bit better than the first half of last year? (Technical difficulties) kind of think through what that comment of the year starting better, what that really means. Is it just the first quarter versus a low first-quarter bar of last year? If there's anything we can read through to that.

Well, look. We're obviously not going to give a quarterly revenue forecast. I think my point on the estimates, which to some degree has something to do maybe with databases but I think is broader than that, is that there was a sense certainly among a lot of the reports I read that at one point we were going to great first half but is terrible second half.

It turned out we had a good third quarter, so there was the sense we're going to have a terrible fourth quarter. Then I said the fourth quarter's actually going to be the best of the year, and so you see a lot of skepticism about the next year.

I think what people may be missing is just the recurring ongoing nature of the business in the sense that every day we're getting opportunities for new mandates and signing things up. And it's not every day we're have a deal announcement, but there's a lot of granularity and diversity to the business that means that it is a recurring business as opposed to maybe a sense that people, at least some people have expressed, that there is sort of some successes and they're going to roll through and there's nothing after that. I mean, that's just -- we've been doing this 21 years and that's just not how it works.

Got it, okay. Maybe just last one around the recruiting, as you mentioned hopeful and thinking that this could be an even better year than last year from a recruiting perspective. How does that impact kind of views around managing the comp ratio?

And are you comfortable if you do have an opportunity to recruit a lot of bankers and let that comp ratio go a little bit? And obviously if you have a particularly revenue year, you still have a higher comp ratio, or how are you thinking about the interplay between the revenue growth and managing the comp ratio?

I think we recruit without thinking about the year-one financial impact. In other words, we're going to take all the really good people that we can find who we also think fit well in our culture and fit specific needs.

Reality is that you're not going to find 30 of those of a year. You take on the number you can find and you think will fit in appropriately. So I don't expect any significant impact on the comp ratio.

But look, if we got an extraordinary opportunity to really add a lot of people or to do - it could be an acquisition, could be anything. If we got an opportunity to really strategically advance the business and it has a short-term negative impact on the comp ratio, I think we would be flexible to let that happen. And I would guess that our shareholders would applaud that.

Got it. Okay, great. Thanks a lot, Scott.

Sure.

Jim Mitchell, Buckingham.

Good afternoon, guys. Scott, maybe in terms of the outlook in Europe, it seems like January has gotten off to a pretty decent start with a couple of large transactions in Europe. What is your sense there? I know last year was such a tough year.

Do you get a sense that Europe is starting to come back and that could be a positive for you guys, given your exposure there? What is your sense on the ground in Europe in particular?

You know how the business works in terms of announcements versus completions, and you tend to get paid based on completions. So I would say last year was a very weak year in terms of the whole industry in European announcements, but we actually had quite a lot of closings so we did quite well in Europe. But I think we and everyone else had a lighter year in terms of announcements.

Look, I think at some point it's going to get a lot better than it has been. I think last year the uncertainty and then the shock around Brexit had a meaningful impact on deal announcements in Europe. If you look at statistics for the UK alone, it was really a dramatic effect in terms of a decline in announcements.

So I sort of feel like it has to get better this year than last year in terms of announcements in Europe without a Brexit shock like that. And I do think at some point, just like in past cycles when you bet on the healthier part of the cycles, that the European market in size look similar to the US market. And we're a long, long way from that today. But when we'll get there, we really think we should benefit significantly.

Right. Makes sense. If you do -- or if you're adding some headcount and we continue to see growth, can you continue to keep non-comp flat, or do we at some point start see that growing?

Well, if you look back at our history that's been a little bit a (inaudible). Our non-comp tends to stay quite flat, and then if you do really big expansion, like in 2008 to 2010 we added a lot of offices so it moved up some. Then later we acquired Cogent, that was quite a lot of people, so it moved up some.

I think with sort of a reasonable level of growth I wouldn't expect it to move much at all this year, which is we said the non-comp should be similar. Yes, you have a little bit more in some costs, but our office pace and such that we have room for these people, and we welcome them onboard and we're pretty good about managing other costs. So I don't think there's any impact there.

Obviously if we're in a really very substantial opportunities to grow, there could be some impact. But I wouldn't expect a lot near term.

And a last one on the new kind accounting guidance on the tax change for compensation, how should we think about that in the first quarter for you guys?

In my mind from an investor's point of view, a businessman's point of view, it's irrelevant, frankly. It's an accounting adjustment in the way you treat restricted stock that vests. it has no impact on cash.

So we will report to investors a number that complies with the new GAAP regulations, but we will also indicate to investors what the tax rate would be and would've been under a historic policy. So to me it's -- lots of companies are going to be doing it.

It's going to cause some probably strange movements up and down, and it will vary over time. So I think it's one of the things that investors will want to probably just look through.

It's another volatility gift from FASB, yes. I think the key it's not a cash item. So we can look through that. Thanks. That's it for me.

All right. Thank you.

Jeff Harte, Sandler O'Neill.

Good afternoon, guys.

Hey, Jeff.

You mentioned a revenue recovery in some of the areas that had been weaker in 2016, Australia, LatAm. Are you actually seeing activity levels pick up in some of those areas, or just pointing out that 2016 was so low there's only way to go from there?

Both, frankly. But no, I'm seeing specific things we are doing that make me quite confident that some of those weaker areas will do better in 2017. So obviously no one can forecast what's going to happen in the whole world of M&A over the course of a year.

There's just some areas we are pointing out that we are quite confident we should do materially better in, and there are others like restructuring advisory where we also said we think we'll do better than. But it's not - we're not just giving you a general statement there. We have a real sense of what people are working on and what's going on in those markets.

Okay. We tend to focus a lot on MD counts when we talk about hiring. Is there a revenue benefit to be had by building out the non-MD level banker count for Greenhill, expanding beyond just hiring MDs?

We're always ready to add people at that level, and we do. Frankly if you even look at people who been promoted to MD here, a lot of them -- some started right out of business school as very young people. Others were latterly recruited as senior associates or VPs or something like that.

And very often, we don't put out a press release, but when we recruit an MD in a new area we very often are bringing in one or two or sometimes more people who may have worked for them in the past or may at least have the skills in whatever sectors those people work in. I think we're doing what it takes there.

We have an absolutely fabulous team, I truly believe globally at that mid-level. I think they can do some more. I think we will also be glad to add some recruits if they get too busy.

Okay. Thank you.

Thank you.

Mike Needham, Bank of America Merrill Lynch.

Hey, good afternoon everyone. I have a couple of questions on your hiring focus. Over the last two years I think a lot of the new hires have been outside the US in Latin America, Canada, London, I think energy also. Can you give us a sense of how they have performed as a group, and are you still focused on expanding outside the US?

I think it's hard to sort of give a measurement of how people are doing in some cases when they've only been here for months. But I'm very pleased with the early signs from people we've recruited. They've been a pretty good mix, I think.

If you think about within the US, obviously a lot of the Cogent team was in the US. We built up the energy team quite a lot in the US.

You're right, we added also in Canada and the UK. The Latin American team works, to some degree, at least. The non-Brazilian teams works out of New York so they're here as well.

So I'm excited to recruit, frankly, in every direction. We expect to add more M&A bankers in the US. We also expect to continue to build out in Canada. We have some interesting possibilities in Europe where we are hopeful that activity will increase back to historic norms.

So I think you will see us add to the firm in almost everything we do over the course of 2017. That, frankly, is an easier way to graft people onto the organization anyway, rather than add a huge number of people in one space. If you added one to each business area, one to each office, something like that it becomes very easy to integrate people and to be part of the team and the way we work here.

Okay, thanks. And then just so I understand for 2016, the gross versus net headcount changes. You started the year at 71 managing directors and ended at 67 ex the 6 promotes. On that basis, you're down four.

I think you hired six externally. If you did a handful of promotions, does that imply 15 managing directors departed last year, or am I missing something?

I think you're missing a lot because it's nothing like that. Also we sometimes have people move from Managing Director roles to what we call Senior Advisor, which is a slightly different role and allows people to do some different things.

So it is nothing like what you suggest. If you want to talk to us individually and go through anything like that, that's fine.

But I don't actually think it's that useful to try to do sort of an accounting exercise of all the comings and goings because the goings have been very, very modest in recent years in terms of any impact the revenue, which is why we had such a great year this year. I think the comings are having an impact on these numbers, but I think will have a much bigger impact on our numbers in the next couple of years.

Okay, got it. Thank you.

Thank you.

(Operator Instructions)

Steven Chubak, Nomura.

This is actually Sharon Leung filling in for Steven. First question is, one of the things that's been proposed as a source of funding for a reduction in the US tax rate is that interest expense may no longer be tax deductible moving forward.

Obviously nothing is certain yet, so we won't know for sure. But how does this inform your business outlook and how does corporates are handicapping this risk?

I don't think that would have really any direct impact on us in the sense that we don't have much debt and if we had a low tax rate we'd have even less because we would bring cash back home. I mean, it could have some impact pro and con on the M&A side. Frankly, it could lead to a lot of transactions as highly leveraged companies looked to be acquired by companies with stronger balance sheets.

But I don't think companies are spending a huge amount of time thinking about that particular issue, at least yet. I think if the market felt like there was a high probability of losing the deductibility of interest you would see highly leveraged companies in the stock market getting crushed and you'd those with very strong balance sheets doing a lot better. I don't at least get the sense that that is happening.

So in my view, that would be a pretty dramatic change in tax policy. I think like a lot of other business people I probably am going to be skeptical of something that dramatic, at least without some long transition period.

Great. That was helpful. Then just another one on the potential impact of the GOP regime. You just noted that over 40% of your revenues are from cross-border activity. While it is still early days, what are your thoughts on the GOP's protectionist rhetoric, and whether or not that could derail some of the cross-border activity in the near to medium term?

I'm obviously not too worried about that and I think you're seeing transactions even announced in the early part of this year. I think you're seeing some and will see some from us that will echo that. I'm honestly just not worried about that right now.

Again, if the market believed we were going to have a shift to high level of protectionism and trade wars, I think the stock market would be behaving differently than it is now. So I think there is rhetoric, and certainly there will be, I'm sure, intervention in certain particular corporate situations or transactions.

But I think on the whole our perception, and I think perception of the clients we talk to, is that we have a very pro-business regime in Washington now with a lot of senior appointees who business people are quite familiar with, and in many cases like quite a lot. So I think that's outweighing any risks of policies that business people won't like.

Okay, great. That's it for me. Thanks.

Thanks, and I think that concludes our last question. So thank you all for joining, and we will speak to you again in a few months.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your telephone lines.