Greenhill & Co Inc (GHL) 2018 Q3 法說會逐字稿

Good day, and welcome to the Greenhill Third Quarter 2018 Earnings Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Mr. Patrick Suehnholz, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's Third Quarter 2018 Financial Results Conference Call. I am Patrick Suehnholz, Greenhill's Head 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 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're made.

I would now like to turn the call over to Scott Bok.

Thank you, Patrick. We reported third quarter revenue of $86.8 million, which is 80% above last year's level, and operating profit margin of 24% and earnings per share $0.43. For the first 3 quarters, we had revenue of $262.8 million, which is up 53% relative to last year. Our operating margin for the first 3 quarters is 23%, which was negatively impacted by $4 million of noncash costs related to the accounting for the earnout on our 2015 acquisition of Cogent Partners, and our earnings per share was $0.99. That figure would be $1.14 if you adjust for a tax charge on the vesting of restricted stock awards pursuant to new accounting rules that took effect at the beginning of last year and principally impacted our first quarter.

Focusing first on our top line. The third quarter was the third consecutive period of substantially increased revenue in comparison to last year. In a year when advisory revenue for our broad competitor group appears to be relatively flat versus last year, we are pleased that nearly every metric for our business is indicating significant improvement.

Specifically, we are showing notable increases year-to-date in terms of our numbers of new clients, total fee-paying clients and clients at the $1 million, $5 million and $10 million fee levels.

From a regional perspective, our revenue from European clients is multiple times higher than last year, and we are also showing improvement in revenue from clients in each of North America, Australia, Japan and Latin America.

By type of fee, we are showing significant increases in the retainer fees, transaction announcement fees and completion fees.

And on the capital advisory side, we are on track for another record year in revenue from secondary market transactions, where I think it's fair to say we are the market leader.

It continues to be our view that conditions are generally favorable for M&A activity globally, particularly for the larger transactions that have historically been our primary focus. It does not feel or lost to us like we are anywhere close to a peak in terms of deal activity. For example, the number of deals $500 million or greater with a European buyer or seller is on track to be very similar to the level of the past 8 years and not much more than half the peak level of 2007. That's despite the fact that stock market values have appreciated substantially since then, meaning there are far more businesses and assets of that scale today.

Apart from M&A, we are also seeing continued favorable conditions for capital advisory transactions. In contrast, restructuring activity has continued to be lighter, but we've made great progress in our objective of building a substantially larger team in that area in preparation for the next economic downturn.

Finally, on top of the fact that market conditions for advisory services continue to be reasonably favorable for all market participants, it's worth noting that this year's financial results from our publicly-traded competitors continue to indicate that independent advisers like our firm are taking market share from the large banks. We believe that trend still has a long way to go and that we can be a major beneficiary of that trend, given our strong brand with both clients and talent as well as our global footprint.

Turning to compensation costs. The absolute dollars of compensation expense increased significantly for the quarter and year-to-date, but our compensation ratio was 55% for both periods, back within its historic range for the years prior to 2017.

With respect to noncompensation operating costs, the bulk of the difference versus last year is due to a difference in noncash accounting adjustments in the 2 periods relating to the earnout on our acquisition of Cogent. There's also a difference between the 2 periods relating to the fact that under new accounting standards, we now include expenses that are reimbursed by clients as revenue rather than as an offset to operating expenses. Our noncompensation operating costs for the year-to-date were $58.6 million, which includes $4 million of noncash charges related to the earnout adjustment noted earlier. That $4 million negatively impacted our operating margin for the year by about 1.5 points.

Adjusting for the impact of the Cogent earnout in both 2018 and '17 and the aforementioned accounting change for reimbursements, our noncompensation operating expenses would have been $49.1 million for the year-to-date as compared to $53.9 million for the comparable period last year, or down about 9%.

With respect to interest expense, we incurred $5.7 million for the quarter, up from last year, given the large borrowing we did as part of the recapitalization plan we announced last September.

With respect to taxes, our rate for the quarter was 25%, which is within the expected range we indicated following the reduction in U.S. tax rates.

Turning now to capital returns to shareholders. Our board declared a dividend of $0.05 per share consistent with last quarter.

Also in regard to return of capital, I will now provide an update on the share repurchase we announced as part of our recapitalization plan. In the third quarter, we took advantage of the decline in share prices for our sector and some increased availability of shares by repurchasing approximately 2 million shares and share equivalents at an average price of $29.85 per share. As of quarter end, we had accomplished 82% of our original $285 million share repurchase goal and had $50 million remaining under the share repurchase authority we announced as part of our recapitalization plan.

During the month of October, we have purchased an additional 0.4 million shares in open market transactions at an average price of $27.08 per share for a total cost of $9.7 million. That means that as of the end of yesterday, we have repurchased a total of 10.9 million shares since our September recapitalization announcement at an average cost of $22.35 per share for a total cost of $244.7 million.

This represents 86% of the $285 million in share repurchases we set as our objective last September and leaves us with $40.3 million remaining to be spent on repurchases.

Going forward, we will be opportunistic about the use of our remaining funds available for repurchases, aiming to maximize the benefit for long-term shareholders.

Given the reduced share count resulting from our repurchase activity, our employees collectively own today approximately 40% of the equity economics of our firm through their holdings of common stock and restricted stock.

At quarter end, we had a cash balance of $125.4 million and term loan debt principal of $336.9 million. Taking into account the additional share repurchases we referred to above, our cash balance as of yesterday was approximately $134.3 million.

As we noted in our press release, the controlled pace of our share repurchases means we never got close to the level of net leverage that our recapitalization plan initially contemplated, and we should soon start to deleverage further from the current level by means of scheduled debt repayments and the continued generation of cash flow.

I will close with an update on recruiting and the longer-term potential that creates for us. First of all, we've now recruited 11 Managing Directors for the year-to-date. It's important to note that these people joined us somewhere between 6 days ago and 6 months ago, so have contributed almost nothing to our strong year-to-date revenue. It's our long-time MD group that is producing this year's revenue. But the group of new MDs represents 15% of our total Managing Director headcount, and we believe it is an important source of potential revenue growth for next year and beyond.

Our recruiting pipeline remains very strong, and we remain intensely focused on continuing to expand our capabilities and increase our scale in order to further enhance the revenue generating potential of our firm. We're excited about the quality of the bankers we are attracting, and we're doubly excited about the way our recapitalization plan has leveraged the upside potential for both our shareholders and our senior team.

Whatever revenue growth we can generate should have a magnified impact on earnings and shareholder value, given the fixed nature of much of our noncompensation expense, the impact of deleveraging over time, significantly lower tax rates and a much-reduced share count.

Finally, I note that we just posted on our website a new investor presentation that summarizes much of what I just said while also reviewing our overall position and strategy.

With that, we're happy to take any questions.

(Operator Instructions) Today's first question will be from Devin Ryan with JMP Securities.

So I guess first I wanted to maybe touch on the momentum that you mentioned that you're having with new clients that's helping drive some of the success that you're having this year. I mean, I know you're always trying to win new clients, so that's not really a new dynamic, so I guess I'm just curious what you would attribute that success to. Is it newer bankers maturing on the platform or something else?

I think it's a combination of newer bankers maturing on the platform, including people who've been promoted internally over recent years. But also, I talked a lot about the number of recruits we brought in this year, but we brought in quite a few last year as well. And for people really to fully get up to speed, it takes more time than a 12-month period. So some of the major new clients we've added this year relate to bankers that we brought in a year ago or even 2 years ago. And I think as we continue to add more industry expertise and various subsectors, it's kind of positioned us to continue to grow the breadth of the client base.

Got it. Helpful. And then just a follow-up to that. With some of those newer bankers added over the past several years, I know you don't like to give too much specific on the backlog. But if you can, just maybe characterize what you're seeing in your backlog today, how that compares to a year ago or beginning of the year. It sounds like you still feel like there's quite a bit of momentum. So if you can give us -- in kind of broad strokes, if you can give us some perspective.

Sure. Yes, I -- look, I think momentum is sort of materially better than it was a year ago or even 2 or 3 years ago, and I haven't seen any signs of that changing in recent weeks with some of the market volatility, not to say that it couldn't happen at some point but we certainly haven't seen it yet. I mean, it's just this one measure. If you just look at the -- we list pretty much every significant M&A transaction we do on our website. Sometimes it takes us a little bit of time to get client approval and so on, but we put it up there. And if you look at the number of announcements for the second and third quarter and you annualize that 6 months, that is significantly higher than it's ever been for us. So no, not every single one of those is a huge one. Of course, we work on a wide range of transaction, but it certainly is an indication that we're getting a lot of things announced. It certainly is broader and more diverse this year in terms of the region it's coming from and even the sectors that it's coming from. And I think that's probably as good an indicator as any. And I would say our kind of the, call it, the internal backlog of things that we're working on but aren't unannounced or public yet. It feels like that is likewise very healthy as it has been for us, of course, for this year.

Got it. Very helpful. And then just last question. I heard your remarks on the leverage and the kind of deleveraging plan and maybe commencing that soon. Can you remind us when you can contractually start to pay down debt? And then just with excess cash building beyond that, like, is it possible to expand the repurchase plan above and beyond? If you could just remind us of that, that'd be helpful.

I think that the key things to know for those who haven't looked closely at it, is that we do have a schedule of repayments. And that schedule does sort of ramp up to a higher level, even starting the end of this quarter. So there's some scheduled debt repayment pursuant to which the debt will decline over time. The other thing to know that as of April this year, we reached the point when there's no penalty at all for our refinancing. So at that moment, you could -- I mean, I think there's often a sort of a first-time issuer interest coupon premium that one pays. And so one

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It down a little bit. We like to do some of those deals, of course, and we do do some. But again, we make a lot of our money on deals that are sort of $500 million to a few billion, and I think those are not quite as sensitive. I mean, we also tend to work very much on strategic transactions between public companies. I mean, certainly sometimes, we're selling things to private equity and sometimes, we're working on behalf of private equity. But the bulk of our work is public companies doing a transaction for strategic reasons. And at least we've not seen yet, any evidence that those companies are dissuaded from pursuing those strategic goals in the M&A market just because of a brief period of market volatility.

Okay. And on the recapitalization, the term loan, am I right in seeing that the term loan principal balance increased quarter-over-quarter despite having made a principal payment in the quarter? Is that right? And if so, why?

No, that's not right. It's gone down by a small amount because the scheduled payments are quite small, but no. Just check your math there again. It's definitely down a little bit, and it'll be down a bit more at the end of this quarter.

Okay. And finally, on kind of headcount and hiring. I think in the press release, you mentioned kind of hiring juniors and kind of building out as well as the MD growth. Is there any kind of a change in thinking? Or how should we think of that relative to kind of MD productivity, kind of increased hiring at the junior level?

We definitely have had a little bit of an evolution in our thinking there. So we've actually hired quite a lot of sort of VP level, what I would call mid-level bankers, VPs or principals and senior associates. We've done quite a lot of that, particularly in the places where we've added a lot of Managing Directors, which obviously is very heavily in New York this year. And essentially, deciding that if you're going to bring in a real estate specialist, an insurance specialist, a utility specialist, that you have to build out a team that has that very specific sort of technical expertise. It's not maybe as critical in some other sectors but in a number of these, it's specialized enough that you really want to get not only an expert at a senior level but some expertise at junior and mid-level. So yes, as we get bigger, we definitely are building out the mid level and junior ranks to support those MDs and hopefully, drive higher productivity.

Today's next question will be from Michael Needham with Bank of America Merrill Lynch.

I guess the first question just as a follow-up on the restructuring advice, in particular. I mean, you guys made, I think, a big senior hire a little while ago, and it sounds like you're starting to add to that group. Can you kind of -- can you give us some numbers in terms of how many people you've added, how you're structuring the compensation to make sure these people are incentivized, just given how the environment's a pretty low default environment?

Sure, yes. I think we said at the time we brought in another senior banker in that area, that we wanted to build up to having 25 restructuring professionals in New York and hopefully, we'll grow out further from there, but that was kind of the initial thought. And we're very close to already there. It happened maybe more quickly than I would have thought was possible. But the individual we hired created a fair amount of notice in the market and knew a lot of people and so, VPs and associates and analysts sort of showed up pretty rapidly, who had expertise in that area. So we're pretty well where we hoped to be by early next year already. And clearly, that's an area where, you're right, default rates are very low right now, there's not a massive amount for them to do it in a way there is for M&A bankers. So obviously, it's been a very strong year for us, but it's not largely due to restructuring, it's really largely due to M&A. And that group of 25, I'm glad -- I'm still very glad they're in place now because every time we see interest rates creep up or markets fall or economic worries, you think we may be a day closer to the point to where the default rate picks up and these guys can really start to generate revenue for us.

Okay, all right. And then on deleveraging, I'm just wondering, I think in addition to those -- the quarterly amortization payments that are required, I thought there was a clause where like your -- half of your excess cash flow kind of goes back into repaying the debt. Is that right? And what's your priority going to be, assuming you're able to generate decent cash flow, if this kind of revenue trend continues? Will you take all that and kind of your first priority is pay the debt down?

In the first part of your question, I won't pretend to be sort of a real expert on the structure of loan documents, but the term you referred to is a little bit different than what you're suggesting there. There is kind of what the lenders call a cash sweep where they sort of take more of your cash in the scheduled debt repayment, but it really only applies with sort of downside scenarios. And frankly, from a creditor's point of view, if you're doing really well, the last thing they want is their money back. If you're doing poorly, they get worried so they want more of your cash flow. So that kind of sweep certainly is not going to apply to us with the kind of results we're having these days and hopefully, going forward. So we will have the issue as you kind of touched on in the second part of your question, which is what you do -- if you continue to have strong cash flow, what do you do with that cash flow? Clearly, a high priority is paying down debt and we have again, the scheduled repayments to do that, we could do some more of that if we chose to under the loan agreement side. I think we may -- as we kind of alluded to at the tail end of our investor presentation, we may look for an opportunity to sort of grow the dividend to some degree over time and kind of, to some degree, slow the pace of deleveraging, but that's only because we're enjoying very strong results right now, and we may frankly be in a position where we can do a lot of debt repayment and deleveraging and still be able to pay out more money to shareholders as well. So that's just an indication of one direction we could go. Obviously, it's going to depend on the results and clearly, the debt repayment has to be the highest priority. And the schedule is one that we put in place a year ago, and we're -- we like the pace of it, and we think it gets us, frankly, without any kind of refinancing, fully repaid before the debt is due, so -- and that was the way we sort of structured the debt initially, was at a level where we thought that it could, if we had reasonable results, just be repaid fully out of cash flow rather than having to depend on a refinancing down the road.

Okay, all right. And just last one. I think in some earlier quarters and some peers called out the accounting for deal pull forward. Was there any meaningful deal pull forward in the third quarter?

We didn't report last quarter the specific impact of that, and we don't intend to going forward. That accounting change about -- that relates to revenue recognition is obviously a permanent change that applies equally to all of our peers. Every quarter, there's going to be some revenue that's going to get pushed out, mostly relating to retainer fees. And then also every quarter, probably for all of our peers who's likely to get some revenue pulled forward relating to transactions where all the material closing conditions are met prior to quarter end, but the parties choose to close just after the quarter end. And typically, that revenue pull forward is going to be larger than the revenue pushed out for us and all of our competitors. And I'd say for this quarter, look, directionally, the difference was a bit larger this quarter than in past quarters. But for the full year, I wouldn't expect the revenue timing differences from the new accounting to be very meaningful at all. What we focus on is really full year GAAP results. And clearly, by pretty much any measure, this is going to be a very good year for us in that regard. Our EPS for the first 3 quarters is already ahead of what the consensus full year expectation was in January 1, and that's despite some unusual things like the costs related to the accounting for the earnout and unusual first quarter tax charge. So that, I just think it's a distraction to sort of get into some sort of reconciliation every quarter because there are puts and takes every quarter. And of course, by the time you get to 2 quarters from now, you're going to be comparing to a period where that's been in place as well. So that's -- but hopefully, that gave you some directional sense.

Today's next question will be from Brennan Hawken with UBS.

I just wanted to follow up on that. So I took a look at what it looked like, the stuff that closed in the early part of the fourth quarter. It looks like there was a pretty large deal. In fact, one of your biggest in your pipe, it was for about $15 million that closed at the beginning of the quarter. Could that have caused some of that larger pull-forward phenomenon that you had referenced in your prior remarks?

As has always been the case, I would never comment on a specific transaction. The number, I think, you're quoting, I'm guessing is sort ideologic guess at what our revenue might have been. And we've always -- for confidentiality and competitive reasons, we obviously have never said or never going to say what a particular fee is, how it's structured between retainer announcement and completions fee or when it's owed or when it's booked and when it's paid. So I think we have to kind of leave it at the more general remarks I made a minute ago.

Okay. And then just really quickly, what I'm trying to reconcile. I think you had indicated that you felt as though there was really no sign of a peak in the M&A cycle. But then when you were talking about the restructuring teams, you felt as though we might be getting closer and closer to busier times for the restructuring business. So can you help me maybe reconciled that? Was the restructuring comment more a speculative one? Or how can those 2 -- just trying to figure out how those 2 statements fit together.

Yes, I think we -- look, restructuring, it is a bit speculative. I mean, we've been almost 10 years without a recession in this country, and I don't think we're going to go 20. So somewhere in the next, I don't know what it is, when -- I don't see a recession kind of near term but at some point, it's out there. And as rates go higher and other factors may develop, I mean, clearly, it's going to come. Right now on the M&A side, as I said, we really haven't seen any kind of a slowdown or pause or anything like that. And also, I wouldn't dismiss the possibility to have a period where both are quite active. I mean, for the bulk of my career, one would be very busy and the other would be very pretty much dead. And you'd have sort of 7 years out of every 10 was great for M&A and 3 were great for restructuring, and life was pretty simple to sort of figure out what was happening. But in the post kind of during the financial crisis, you obviously had M&A pulled way back, but you also had restructuring kind of not pick up as much as expected, given the Fed's first time ever move to 0 interest rates and obviously, in Europe, the Central Bank got even more aggressive. So I do think it's possible that when restructuring starts to pick up more, that there might be some life left in the M&A market, but that's obviously all somewhat speculative because we've never seen a period like the last several years. And who knows how things will develop in those 2 markets going forward?

Okay. Thank you, and I think that's all our questions for today. So we thank everybody for dialing in, and we'll speak to you again in a few months. Bye now.

The conference is now concluded. We want to thank you for attending today's presentation. And at this time, you may now disconnect.