Greenhill & Co Inc (GHL) 2020 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the Greenhill Third Quarter 2020 Earnings Call. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Patrick Suehnholz, Head of Investor Relations. Sir, please go ahead.

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's Third Quarter 2020 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 Chairman and 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 are made.

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

Thank you, Patrick. We reported third quarter revenue of $56 million and a loss per share of $0.49. For the year-to-date, we had revenue of $170.9 million and a loss per share of $1.69. Revenue for the year-to-date was down 12% compared to last year. In short, for the year-to-date, significantly increased restructuring revenue has not been sufficient to overcome significant declines in M&A and capital advisory revenue. However, consistent with our comments last quarter, based on the expected timing of various M&A and restructuring projects, we expect a particularly strong fourth quarter, resulting in a respectable revenue outcome and a net profit for the full year.

Before I go into more detail on our results and outlook, I'll provide you a brief update on our operations during the pandemic. In summary, we have continued to function well operationally, maintain close client relationships, build new relationships and provide the same high-quality advice we have always offered. Many of our offices have reopened to some degree, but regardless of how long it takes to get everyone back into offices, we are fully prepared to continue for as long as necessary in a hybrid work model as we advise clients on addressing challenges and pursuing opportunities created by the pandemic.

Now I will provide a bit more detail on our results and outlook. As noted on recent quarterly calls, we saw a big increase in restructuring activity as the pandemic took hold, and we were well positioned to take advantage of that, given the significant and well-timed expansion of our restructuring team over the 2 years prior to that. Based on our expectation regarding various restructuring completions, we expect that by the time our full year results are recorded, it will be clear that restructuring is now a major contributor to our firm's revenue and provides a valuable hedge against periods of economic weakness and reduced M&A activity. Given continuing financial distress in many industries, we expect restructuring to continue to be a major revenue contributor for at least 2021 and likely beyond.

While the decline in M&A activity in the early part of the pandemic more than offset the benefits from increased restructuring activity, the third quarter saw a sharp increase in M&A activity, particularly in the many sectors that have not been adversely affected by the pandemic. We, therefore, expect M&A to be a solid contributor to our full year results alongside restructuring. Furthermore, based on the pace of new assignments at our firm and the fact that overall M&A activity this year is far below historic levels, particularly relative to total stock market capitalizations, we expect the increased level of M&A activity to continue. This is obviously important for us as M&A continues to be by far the largest part of our firm.

By region, the U.S. will be a major contributor to full year results, given that it is where the bulk of our restructuring activity is located. Europe has a smaller restructuring opportunity than the U.S., but will be a major contributor to M&A revenue. Deal activity in Europe has been depressed relative to the U.S. for several years, but we are hopeful that what we are seeing is the beginning of a strong rebound. Other regions will likely make a reduced contribution this year, but we are seeing signs of an M&A rebound across all markets.

Turning to expenses, our compensation ratio for the year-to-date is significantly higher than normal, but we expect to bring that down by year-end as a result of higher revenue. Our non-compensation costs are materially lower for the year-to-date, and we expect that to continue until the pandemic is behind us. Even then, we expect to see some expense savings relative to historic levels.

In other costs, our expense -- interest expense has continued to decline as a result of last year's refinancing and recent declines in interest rates as well as from some reduction in debt levels. Our tax rate is not meaningful for the year-to-date, given a loss, but we expect for the full year that it will be at or slightly below the mid-20% range we have indicated for the last few years.

I will close with a few comments summing up our strategy. With respect to revenue, we aim to increase productivity by managing our senior banker and supporting professional headcount such that we have more resources in high fee areas like M&A and restructuring in the most important markets and less resources in lower fee areas. We've had some personnel departures that will help with the latter part of that equation, and we have a robust recruiting pipeline that will help on the former part of that equation.

With respect to costs, we've taken the opportunity to reduce costs where appropriate and possible and will continue to do so. One example is that the rent cost of our New York headquarters will be materially lower starting next year. Plus, of course, our interest expense will continue to decline as we pay down debt.

With respect to capital management, our primary focus is on accelerating debt repayment. And if this year ends as we expect, we will make progress in this regard early in the new year. Alongside accelerated debt repayment, we also expect to resume prudent share repurchases early in the new year, in part by means of tax withholding on the vesting and restricted stock. Our team collectively owns about half the economics of our firm through stock and restricted stock. As a result, we have a powerful incentive to implement the foregoing strategy such that we substantially enhance long-term shareholder value for the benefit of external and internal shareholders.

With that, I'm happy to take any questions.

(Operator Instructions) Our first question today comes from Devin Ryan from JMP Securities.

I guess, first question on the commentary around the fourth quarter. It sounds like it should be, obviously, quite a strong revenue quarter is the implication. And to drill into the restructuring piece, is it fair to think that the fourth quarter is really the first quarter where the pandemic restructuring activity is going to be hitting? And is that type -- is the fourth quarter kind of an aberrational quarter for restructuring? Or as you look into 2021, are those the types of quarters that we should expect just based on how the backlog had built? I don't know if you can give any more flavor for that. But what I'm trying to just think about, kind of the step function in the potential for restructure relative to what has been contributing through the first 3 quarters of this year.

Okay. Good question. I'll try to help a little bit on that, although it's -- of course, it's always hard to quantify too much or forecast too much, of course. Look, we came into this year with a -- certainly a smaller restructuring pipeline than most of our peer firms would have had. Most of our peer firms had much, much bigger groups. We were just in the process of ramping up starting in 2018, very heavily through 2019, building up a team, building up a backlog. And so what we're going to see in terms of restructuring contribution this year is going to very heavily fall in the fourth quarter, and it's going to be very heavily stuff that -- the opportunities that developed in the early days of the pandemic.

So I do think, of course, those opportunities are going to stretch out. I mean, clearly, with what's going on with the virus and further economic lockdowns and slow return to things like travel and areas like that, I mean, clearly, there's going to be a prolonged impact of that pandemic. And I think the -- kind of the message I'd like to convey in response to your question is that we just have a kind of a newly expanded team as of really kind of right around just the time this pandemic really hit. And so we didn't have as big a backlog probably as most of our peers did coming into the pandemic.

And so if you think about how long it takes, even for a pretty fast-paced restructuring to get to the completion line, I mean, a lot of those things we -- those opportunities we won in the early days of the pandemic, many of them -- a little bit of closure in Q3, a lot more in Q4. Certainly, significant amounts will roll over into next year. And then I think very importantly, going forward, we now have for over a year now in place a significantly expanded team.

So I think for us, the -- kind of the run rate, if you will, of restructuring, there really should be a step function change from where it was, say, certainly 2 years ago, even a year ago. And you'll start to see the real benefit of that, I think, in the next quarter or two.

Okay. terrific. Yes, I was just really getting at, just to make sure that the fourth quarter wasn't exhausting the current backlog, which it doesn't sound like it is.

Okay. Great. And then just a second question around just headcount, senior banker headcount, obviously, taking a little bit of a step back here. You mentioned kind of shifting where you're focusing. I guess where have you pulled back a bit? And then if you look at the pipeline today, where are you going to be leaning in? So if we think about 2021, where are the opportunities? And when we look at the compensation line, is there any additional compensation in there just tied to headcount reduction, so maybe it's a bit higher? I'm just trying to think about the nuance for the comp ratio. I know there's not too much to read into it because of the revenue quarter, but to try to kind of think through since there was another step down.

Yes. Look, I think we -- for example, we're pulling back from areas of M&A where we think there's just not nearly the fee opportunity. Certainly, Brazil was a great example of that. I mean we were there for a number of years. Maybe between what happened with that currency there getting crushed and valuations of assets getting crushed, there just isn't the opportunity to earn fees that are going to get you to the kind of productivity level that you want. So that's one example.

In capital advisory, where we're definitely going through a bit of an evolution, we've been in that business for several years. We're really kind of an unchanged focus in Europe and in Asia, which is probably the fastest-growing part of that business. In the U.S., I think we probably had ended up with too big, top-heavy concentration of resources when you probably would ideally have the team be -- maybe a very similar size, but a somewhat different shape to go after that business. And I think also to evolve the way that business -- what that business pursues away from the sort of the standards, secondary transactions where an endowment or a pension fund is selling a block of private equity interest to a secondary fund, to doing more complex general partner restructuring type transactions where you're working with private equity funds to meet their objectives. And so I think there's some evolution, both in terms of the shape of the org chart and in terms of what business you're going after there to, again, ramp up the productivity to the level we want it to be at.

Our next question comes from Jeff Harte from Piper Sandler.

A couple from me. When we look at, at least the visible closings or the things we can see for the third quarter, it appears, especially from some of the website stuff, that there were a number of closings kind of the last couple of days and maybe even in the first day of the fourth quarter. Did that have any impact as far as revenues being kind of pushed forward into next quarter or kind of pulled back into this quarter?

I don't think there was -- I mean, there's nothing actually that springs to mind of any materiality. So I think there probably were some things we thought would get done in the third quarter that are ending up in the fourth quarter. But directionally, I think what I've said today is very consistent with what I said last quarter, which was we thought the third quarter would be better, but the real strong quarter that would get us to the result we want for the full year would be really a very heavy fourth quarter. And that continues to be the case. So yes, some things moved around a little bit, but certainly no material pull forward of revenue. If anything, some things that we thought might get done in the third quarter ended up slipping into the fourth.

Okay. And you mentioned M&A conversations or at least kind of things appearing to be coming back pretty strongly. We've heard that from others as well. I guess, historically, I'm used to thinking of you guys as being more on kind of large deals, and that implies kind of cross-border deals. So I mean are you kind of seeing the pickup in your traditional areas of strength as well? It kind of seems at the pandemic that maybe cross-border has been kind of sluggish.

I would say yes. What we're seeing -- I mean, we're -- I feel like we're seeing -- and I know others have said very similarly, a real kind of across the board pickup in M&A dialogues. And that's -- involves a lot of public companies, it involves certainly a lot of private equity as well. And it does actually involve larger transactions and cross-border transactions. I know that sort of seems like a difficult thing to do in an era where it's not so easy physically to cross a border to do due diligence or meet management or have a contract negotiation, but people are finding a way to get it done or at least to get offers rolling.

So I think, at least from the indications we see right now, I actually think 2021 could end up being really a very busy year of M&A, not just for our firm, but I think the whole market. But I think we'll -- we should be well positioned to participate fully in that and to see that kind of manifest itself in the way it typically has for us, which is public company deals and larger deals with a heavy component of cross-border.

Okay. And looking at comp expense, it seems like it kind of touches down around $46 million, $47 million in recent quarters. Is there any kind of a dollar floor we should think of? And I guess I'm trying to kind of get my mind around if revenues get quite a bit better next year, how much comp kind of flexibility could there be as far as driving those revenues down to the bottom line?

Look, I think there's -- we -- look, the first 3 quarters is kind of a misleading one really to look at the comp ratio. I think when we get to the end of the year, you'll say, okay, at least I think you'll say, okay, this was a pandemic-impacted year. Clearly, that had an impact on revenue. The firm came into the year 2020 with a very positive outlook and COVID came along and sort of created a bit of an air pocket and pushed some things back. But I think we'll get to way what you'll think is kind of a reasonable place for our comp ratio for the year. And then I think next year and beyond, it should be returning back to kind of a more normal sort of level. And that implies a lot of comp leverage -- a lot of operating leverage in the sense that just going from a very elevated comp ratio back to a normal comp ratio means really dramatic impact of higher revenue. Which we, again, are kind of expecting to see in the fourth quarter and certainly helpful to see next year as well.

Our next question comes from Michael Brown from KBW.

Scott, I wanted to ask about the capital advisory business. So you touched on that a little bit in your -- in Q&A already, but I wanted to ask about some of the, I guess, financial implications of those departures. So one, from a revenue perspective, I was looking at one of your investor presentations, and that business contributed about $50 million of revenues in 2017, '18 and '19. So I guess, one, where do we -- where can you kind of offset that revenue headwind? It sounds like it's going to be the restructuring business next year, but just interested to hear how you'll kind of overcome that headwind.

Two, is there any deferred comp benefit that we should see or contemplate in our fourth quarter numbers? Is there kind of a clawback component there? And then three, can you just give us a view into the margin for that business? It sounds like you mentioned it was somewhat top heavy. Perhaps it wasn't all that efficient of a business, but just some color there would be interesting as well.

Sure. Okay. To put it in perspective, I would say that business as a whole for the time we owned it -- and we bought it, of course, as a fully functioning, already fairly old business, so it was up to a normal run rate. It averaged right just kind of at or just under $10 million a year -- a month -- I'm sorry, a quarter, $10 million a quarter, $40 million a year. The $50 million was -- I'm not sure your numbers are quite right for the last few. We did have some higher and had some lower, this year much lower just because the pandemic impacted that business so heavily. But I would think of that historically as a $40 million a year revenue business.

I would say it was somewhat top heavy. It also is a little more sort of regulatory costs and things like that. It's a little bit different than our other advisory businesses. So I think if you thought of that as maybe a 20% margin business, i.e., a couple of million dollars of pretax income per quarter. And again, what happened with some people leaving really hasn't impacted us in Europe, hasn't impacted us in Asia. So you're talking about we lost people who contributed some portion of $2 million a quarter in pretax income. So certainly not the end of the world.

As I said, I do think we, over time, evolve to having, frankly, too many people at the senior end. And sometimes that's not the best way to maximize revenue relative to more of a kind of a normal shape org chart where you've got more supporting people helping to drive the business. So we'll evolve that business in a few ways, I think, trying to make it more efficient than it has been. And this is very natural, by the way, after an acquisition that once you get through the whole contractually committed period and earn-out period that you end up doing some restructuring. And my goal as we get through that is to end up with a little more efficient team, a little less top-heavy team and a team also that is focused more on sort of the more complex end of the transaction spectrum as opposed to almost entirely on kind of more straightforward secondary transactions.

So I don't know how much -- I don't expect all that much of an impact based on where the business is today in terms of income. And as I said, we will rebuild and restructure there as necessary. And at the same time, kind of unrelated, really, we have a pretty robust pipeline of M&A candidates in what I think of as the best, highest fee markets that we'll be looking at in coming months as well.

And just about -- was there -- is there any deferred comp?

Yes, yes. (multiple speakers) And there will be. Yes. And there -- of course, there always is some of that when people leave. So yes, that will be one of the things that gets thrown into the mix in the fourth quarter. Not something necessarily that was expected, but it is -- that's why there's just so little impact, I think, in terms of near-term earnings, is that you do get the benefit of some clawback. And between increased revenue and that, that all gets thrown in the mix in terms of where I think comp ratio ends up for the year, and I've commented on that already.

Got it. And then to switch gears on Europe. You mentioned that is kind of an area that sounded pretty favorable in your prepared remarks. And we've certainly seen that. The M&A market recovered there a little bit earlier than the U.S., and it's been pretty active. How are you thinking about the activity though recently? I guess, have you seen any impact in the last couple of weeks from the lockdowns there in certain markets? Or is it just that everyone understands that this is going to come up, and they've learned how to work virtually and get deals done and this is just an operating environment that everyone's adapted to and it's not going to be a major headwind? Or have you seen a little bit of a pause at all?

My belief as we sit here today and interacting very regularly, of course, with my European colleagues is that I don't think we're going to get a further setback like we obviously did in the springtime. I think the sort of the severity of the lockdown that we had in the spring, which clearly created a pause everywhere, I think the lockdowns by governments are likely to be either more limited -- well, more limited in either duration or in terms of extent. And on top of that, I think private equity funds, public companies, et cetera, have all learned better how you do transactions in this kind of constrained environment.

So I do think that we certainly have seen a very pleasing pickup in European M&A activity and I don't think the recent news is going to set that back too badly. Simply because, I think, governments have realized that there's just a limit to how long they can shut down or how tightly they can shut down without doing really irreparable damage to economies. So I think the bit of a rebound we started to see, I'm pretty hopeful, we'll continue to see play out.

Okay. Great. And just one more for me. On the hiring side of the business here, what areas are you kind of targeting? Could you just put a little finer point on where you're seeing the best growth opportunities? And then two, where you kind of -- where do you see the best opportunity to bring in talent externally? And is the fourth quarter typically when that happens? Or is that typically more like a first or second quarter event next year when you have the most success hiring externally?

I think the industry has evolved to the point where it tends to be a bit of a year-round task to recruit that it used to be that people got paid their bonuses in January and February, and they moved jobs in February and March and April. I think it's become a little more evenly distributed throughout the year. I mean, obviously, this year, the pandemic set things back where people really couldn't kind of get face-to-face and meet new candidates or have them meet -- and even if they know -- some of you to meet the rest of your team and so on.

So I think it's a little bit spread out. But this year, I would probably think, and maybe most years, there's probably more recruiting sort of late first quarter, at least recruiting that you see, that becomes public, maybe late first quarter and second quarter once people have sort of been paid their bonuses and are thinking of moving somewhere else. So I think that's probably in terms of timing.

And where I see the most -- where I have the most interest in and maybe where we have interest is what's driving what we're seeing is the parts of M&A that are the most favorably impacted by the pandemic. And that's things like consumer, some parts of media, some parts of health care, some parts of telecom and tech infrastructure and things like that. So -- and of course, those are areas that are -- have had the benefit of favorable growth going -- even well before the pandemic, but it's just been accelerated by the pandemic. So that's kind of where I think we have the most interest and see the most opportunity right now.

And ladies and gentlemen, our final question today comes from Richard Ramsden from Goldman Sachs.

It's James Yaro filling in for Richard. So maybe the first one, just on the capital raising business. You've talked about the departures and the impact on revenue in that business, but maybe you could just talk about the forward trajectory. And we've heard pretty positive commentary on the recovery in that business from some of the peers this earnings season.

I don't necessarily want to forecast an individual business. But I would say that -- and there are many aspects of that business, I think is the important thing to understand, really. There is fund raising, doing primary fund placement to raise money for private equities. We are not in that business. Some funds -- some firms are. And I'm not that familiar, but I can imagine that private equity is growing, and perhaps there's more of that coming. And then there's kind of more sort of straightforward secondary transactions where one fund sells a portfolio of investments they don't want to own any more to another fund and that we were -- and are very active in.

And then there's a third business, which we've spent some -- had some success in, but we really are trying to focus to do a lot more is in the area of secondary transactions that also involve the fund that manages the capital. Where you're kind of changing -- maybe you're prolonging the fund, maybe you're rolling investments that are fairly long-held already into a new longer-term vehicle or something like that. So they tend to be very tailored, very complex. And frankly, just like in the M&A and restructuring world, the more complicated the things are that you work on, tends to be the higher fees that you end up earning. So we want to do more of that.

And I think, look, I think probably all 3 parts of that business got hit pretty hard in the pandemic. And I think there's just been -- and now there's been as much volatility on the way up as there was on the way down. So I don't know how quickly all that will come back. Certainly, we're not seeing as robust a rebound in that as we are, say, in M&A over even the last several weeks. You can suddenly feel that MA is really much, much more active in terms of corporate dialogues. And I wouldn't say we quite feel that on the capital advisory side, but clearly, there's some pickup there post pandemic.

Got it. That makes sense. And then you talked about extremely robust restructuring for 4Q '20 and a strong revenue backdrop generally for the coming quarter. So maybe just on the restructuring side, are you expecting a step-down versus the 4Q '20 level, but activity will still remain elevated? Or are we really expecting to see the strength in 4Q '20 continuing at the same level of strength into 2021?

Well, I think you have to -- with restructuring even more, frankly, than M&A, you have to measure, maybe if you're in my position, running a business, the level of new opportunities you're winning and sort of how busy and active your team is. What you can't predict is when those things are going to reach completion. So there -- it's all -- just like M&A, it's always going to be a lumpy business, and you're going to have some quarters where more completions fall than others, and it's going to look like you're doing terrifically well one quarter and less so another quarter.

But I think in terms of the more fundamental question, the only part where you really can try to control is how many assignments we win. We feel good about that for -- certainly for the medium-term in the sense that we think, given the pressures of a second wave in the pandemic, it feels like some of the industries that have been really hurt by the pandemic are going to continue to be hurt, and we think there's going to be kind of a target-rich environment in terms of restructuring opportunities. And we think we now have a team and a set of credentials and the scale necessary to win our share of those. So I think we can -- what I'm saying is I think the -- sort of the stuff flowing into the pipeline feels like it's going to continue in a very positive way for a good long time. How and when that stuff gets across finish lines and triggers completion fees, that's just going to ebb and flow as it always does.

And I think that was our last question. So I thank everybody for dialing in, and we'll speak again in about 3 months. Thank you.

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