Greenhill & Co Inc (GHL) 2020 Q2 法說會逐字稿

Good day and welcome to the Greenhill Second Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Patrick Suehnholz. Please go ahead.

Thank you. Good afternoon and thank you all for joining us today for Greenhill's Second Quarter 2020 Financial Results Conference Call. I'm 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. Do 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 second quarter revenue of $47.8 million and a loss per share of $0.79. For the year-to-date, we had revenue of $114.9 million and a loss per share of $1.19. Revenue for the year-to-date was 7% higher than our figure from last year when we had a weak first half that was followed by a strong second half.

We came into this year expecting the positive momentum from last year's second half to continue, but the pandemic and resulting economic downturn put a pause on that. Despite that pause, based on the timing of various M&A and restructuring assignments, we expect to see sequential revenue improvement in the current quarter and a particularly strong fourth quarter, resulting in a respectable revenue outcome for the full year.

Before I go into more detail on our results and outlook, I want to provide an update on our operations during this pandemic period. Consistent with what I said on our last call, we have continued to function well operationally, maintain close client relationships, build new relationships and provide the same high-quality advice we've always offered. While a majority of our people are still working remotely, our global team remains connected, engaged and highly motivated with a remarkably high level of morale at all levels despite the many personal and business challenges created by the pandemic.

In recent weeks, most of our offices around the world, including the New York headquarters where I am right now, have reopened and people have started to return. But regardless of how long it takes to get everyone back into our office, we are well positioned to continue to serve clients in the interim as they navigate the complex challenges created by the pandemic. In fact, during the second quarter, we were able to win and execute certain restructuring and even M&A transactions for clients without ever having met them in person.

Now I will provide some more detail on our results and our outlook. In the first half, we saw a significant increase in revenue from our recently enlarged and still growing restructuring advisory business. We historically had a very small but high-quality restructuring team until we decided 2 years ago to embark on a major expansion. While it is difficult to provide quantitative data on this business given its close interrelationship with the M&A business, it's fair to say that our dedicated restructuring team is now multiple times bigger than it was previously, and our capacity is further expanded by the involvement of numerous industry sector and M&A-focused bankers.

Consistent with the growth in the team, our restructuring-related revenue for this year will likewise be multiple times greater than it was last year. Monthly restructuring retainer fees are at all-time high levels and as completion fees follow in the second half, we expect this business to be a very important contributor to our total revenue for this year.

To give you some granular sense of the pace of activity and progress on major assignments we are seeing, in the past 3 to 4 weeks, we've advised on 4 significant pre-arranged bankruptcy filings for Cirque du Soleil; for fast food restaurant owner NPC; for Global Eagle Entertainment, which is reported in today's Wall Street Journal; and for Ascena, the owner of retailer Ann Taylor, which was reported earlier today in the Wall Street Journal. We are a debtor adviser, which is typically seen as the largest role on all but Athena, where we are representing creditors.

Beyond what we foresee this year, we expect this restructuring cycle to run for multiple years as the impacts of the pandemic propagate and evolve. And already, we have won assignments where we expect completion will come next year rather than this one.

Offsetting the increase in restructuring revenue in the first half was the fact that industry-wide M&A activity fell to the lowest levels of the financial crisis and the capital advisory transaction volumes fell similarly. However, we are optimistic about improvement in both areas going forward. M&A volume as a percentage of total stock market capitalization, a measure analysts and investors have historically used to monitor the M&A cycle, is at the lowest level since that figure started getting measured in the 1980s.

In addition, in our firm, we've actually seen an increase in new assignment activity for M&A in the first half compared to last year. The challenge is simply that many transaction processes are either paused or are progressing slowly given uncertainty created by the pandemic.

Likewise, on the capital advisory side, transaction volume was far below its level of last year. With institutional investment portfolio managers continuing to grow their private equity allocations and specialized funds focused on the secondary private equity market also continuing to grow, there is good reason to expect that secondary market capital advisory activity will return to pre-pandemic levels and grow from there once visibility as to the virus and the economy improves to some extent.

By region, the U.S. will be a major contributor to our full year results given that is where the bulk of our restructuring activity is located. Europe has a much smaller restructuring opportunity than the U.S. but made a major contribution to our first half revenue and should for the full year based on increased M&A activity there. In Australia, Canada and Japan, we're seeing reasonable levels of activity, and we expect respectable contributions to our full year.

As noted in our earnings release, during the third quarter, we exited Brazil by selling our business there to the local team for a nominal sum. We had a good group of bankers in Brazil, but we did not find the kind of larger cross-border opportunities we found in other markets. As a result, particularly given the weakness of the Brazilian currency, we generated modest dollar revenue and proved unable to generate a return on our investment in that market. Accordingly, we expect this move to be modestly accretive to our productivity and profitability statistics going forward.

The update on Brazil is a good segue to speaking about expenses. We are taking a number of steps to reduce our operating costs where possible while continuing to invest in the long-term potential of our business. With respect to personnel, we expect to end this year with about the same head count we started the year. But within that number, there will be some reallocating of headcount to areas we believe have greater potential. For example, continuing to build up our restructuring team and certain sector-focused teams while exiting Brazil and losing the dozen or so employees we had there.

Our compensation costs for the first half were up about 10% compared to last year given some headcount growth we had since the prior period, and our compensation ratio was elevated by the low level of revenue. As we did last year, we will aim to bring that ratio down considerably by year-end.

Our noncompensation costs for the first half were meaningfully lower than last year's level despite some nonrecurring costs related to our exit from Brazil and to our expensing rent on 2 New York offices while we build out new space that we will move into later this year. For next year and beyond, our rental costs in New York will be lower than recent levels, so this brief overlapping cost is a good investment.

In other costs, our interest expense has continued to decline versus last year as a result of last year's refinancing and recent declines in interest rates, and our tax rate is not terribly meaningful given the unusual first half loss. As noted in our press release, based on our outlook for both revenue and expenses in the second half, our objective and expectation is to generate a net profit for the full year.

In terms of capital return and liquidity, we declared our usual quarterly dividend, but we have continued the pause on share repurchases that we implemented when the pandemic began. We ended the quarter with $84.6 million of cash and have only $3.1 million in remaining principal repayments scheduled this year. Given our expectation of a strong finish to the year, we aim to be making incremental debt paydowns by early next year.

Now I'm happy to take any questions.

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

So I appreciate the commentary on kind of the outlook in, I guess, the next several quarters, have some line of sight into. I'm just curious as you're thinking about the fourth quarter, obviously, still a little ways away, kind of the expectation of a pretty strong result. Is that based on activity that's already been announced? And so you have some pretty good visibility into just timing of completions? And how much of that kind of expectation is activity that hopefully will come together but maybe is less certain because the deal hasn't actually been announced?

I would say a very high portion of that is kind of announced in one way or another or at least signed if it's not publicly announced. So there are very smaller things that we expect will still both get signed and completed this year, but obviously, we're already in July, so there's not a huge amount of that. So I'd say we have pretty good visibility as we often do for sort of 4 or 5 months out. Obviously, it's always foggier when you get to a year out. But for this kind of time frame, you can look at what's already well underway and have a pretty good view usually as to when things will close.

Got it. Okay. And then in terms of just the M&A markets more broadly and the outlook there, we're kind of in this unique moment where there's just extreme uncertainty and whether the virus creates another shutdown. And so I think there's kind of concern there.

On the other hand, Europe feels maybe slightly better in terms of their positioning with the virus. I'm curious, are you seeing kind of M&A activity track kind of the reopening? Meaning, is Europe maybe coming together faster than the U.S. just because there's maybe the ability to meet more in person? Or how are you thinking about I guess the markets from geography? And then how important is obviously the reopening to the ability to restart the M&A engine?

Yes. Look, I don't see a lot of difference across the regions. I do feel like that activity and sort of momentum in the M&A market has ticked up in recent weeks. I don't think people are going to be meeting face-to-face with the clients very often for probably a good while yet, so I don't think that's a factor, Europe versus the U.S. I think there's still going to be probably pretty minimal face-to-face meetings and more by phone and e-mail and all the rest.

So I have -- I feel like I've seen some uptick in activity in recent weeks. I mean what I really am banking on more than anything is that I can't predict how long the sort of the unusual period we're living through from a health perspective is going to last. But I do know that literally, the only time in my career when M&A volume was as weak as it is right now was really 2009. That was by far the worst year, the financial crisis. The next year, there was a 50% increase in M&A activity, and that stayed at least at that level for the next 10 years. You can go back to, like, literally the year I joined this firm, 1997. The statistics were quite similar to what they're on track for this year and think how many fewer firms were even in this business back in 1997.

So I think there's just a tremendous kind of pent-up demand that one normally sees when there's a big shutdown like there was in 2009 or like there is. And that statistic I alluded to in my talk about M&A as a percent of total stock market cap, I mean that literally has ranged from all the way back to the 1980s from between 5% and 15%, sometimes a little bit higher, percent of total market cap, and it's below 3% right now. I mean it's never been below 5%. So I think whenever things do kind of get back to normal, and I think they're starting now, I think that we're going to go back to what's been the norm for the last decades for M&A activity.

Yes. I appreciate that. And we look at those stats as well. I guess the last question on the restructuring business. You're benefiting from growing your overall franchise as you've added a number of heads, as you mentioned, but also just the pretty substantial uptick in industry activity. When you think about kind of the momentum this year in terms of impact on revenues, you have a good, nice step-up this year from last year.

But just given the nature of the deals and the length of time from announcement or start to completion, it would seem that there's quite a bit that's been announced recently that could be more of a 2021 revenue event. I mean is the expectation at this point that 2021 could see kind of another step function higher in revenue just based on your views of the market for restructuring remaining active for a few years?

Yes. I mean I actually -- I'm quite optimistic about what's even going to fall in 2020 just based on the status of various things that are pending out there. But I think wherever we end up, I would expect 2021 for us and probably for the whole advisory industry to be as good, if not better, than 2020 in terms of restructuring revenue.

For just the reason you point out, these things do have a long time frame usually, but I won't say always. I mean sometimes you can quickly get to kind of a pre-arranged deal, everybody has agreed and yes, you've got to still put it through court, but things can move pretty quickly there.

But a lot of deals, of course, do have a longer tail to them. And so I think 2021, and frankly, probably 2022, I mean this is going to be a real kind of bifurcated impact on the economy.

There are many industries, of course, almost completely unscathed, maybe even better off as a result of the crisis. And there are others like retailing and energy and some aspects of industrials that are anything to do with transportation, leisure, et cetera, that companies have really been hammered by this. And they're not all in bankruptcy yet, but there will come in time as maturities come closer, that more and more are going to need to do some kind of a restructuring in an out of court.

Your next question comes from Michael Brown from KBW.

So if I go back to your fourth quarter earnings call, one of the things you pointed to was the strength in the Brazilian franchise, and you had noted that they had their best year ever in 2019. So here, what you're kind of saying about, their reason to sell. But I wanted to just learn more -- a little more about that.

Is it just that the environment has shifted so significantly since then? You really weren't seeing an opportunity to -- for that franchise to be profitable going forward? It just seems like a major shift in a rather short period, so just wanted to hear more about that.

Well we really had 1 good year out of the 7 that we were there in a financial sense. And that was -- last year was reasonably good. Again, not material to the firm at all, but at least it had good momentum. I mean, as you know, if you followed it all, I mean, Brazil has had a series of sort of political and economic crises. And so notwithstanding, as I said, a very high-quality team, we really struggled to make much money down there, make really any on a longer-term basis.

And with the virus -- the onset of the virus, I think the potential to continue that momentum into this year, I think that any hopes of that sort have pretty quickly went away. I think life might have been quite different had the virus not hit. But whatever impact we're feeling in places like New York and London, it's going to be a multiple of that down there, so we are -- I think that what we're doing is absolutely the right thing in terms of the productivity and profitability of our firm, but -- and won't certainly have any kind of material impact on revenue. But also, I think it's good for the team to be independent and let them have their kind of domestically oriented business down there, and we wish them all the best.

Okay. Got it. And just wanted to go back to your comment earlier. So it looks like for year-to-date, you've lost about $22.5 million, and it sounds like you are expecting or your goal is to turn a profit for the full year. That would be really well above what the consensus estimates are predicting. Given what we're seeing in kind of the industry announcement trends, that does seem like a pretty tough hill to climb.

So could you just help us understand that a little bit better? I know you mentioned it's kind of revenue and expenses both contributing there. Can you give us a little bit more color on what's the really key revenue drivers? Is it that you're seeing a pickup in kind of the retail restructuring environment? That seems to be a little bit -- maybe quicker closing time so that restructuring is going to come through a little bit sooner?

Or is it that you're going to be able to pull down on the comp cost a little bit more in the second half or noncomp a little bit more? So just a little bit of commentary there would be helpful for us to kind of square that with what the expectations are out there.

Sure. First, obviously, we're going to do what's prudent on expenses. But really, I'm talking about revenue as being the driver to get to where we think we're going to get for this year. And notwithstanding the fairly dreadful market-wide statistics on M&A, we're a sized firm where it all just depends entirely in our individual pipeline.

I mean -- and so I'm looking at specific M&A transactions, specific restructuring transactions, what the progress to those is, which ones we think will close on a probability-weighted basis. And that gets us to an outlook that, yes, I will agree with you, is quite different from what the consensus is.

I think probably to a significant degree, people have still not appreciated how large our restructuring business has become and frankly, they're probably missing to some degree some of the potential we've got in the pipeline from M&A as well. But probably the biggest factor is I think people haven't quite taken on board that we, for the first time, are a significant player in restructuring.

Great. Great. And then just one more here. Any outlook or commentary on your expectations for the Cogent business as we think about the second half here?

I would say in my outlook for the firm, for the year, I'm not building in some huge bounce back in the second half for that group. But I do think that either late this year or early next year, there will be a significant pickup there. I mean that's been a remarkably steady business over the years.

But whenever you have a real dislocation, like we did in the first quarter, you can naturally see why investors think, well, I want to see the first quarter marks before I transact. And then, of course, by time those came out, you had this huge rebound. So I think it's natural for investors to say, "I want to see the second quarter marks before I consider transacting."

So I think sometime later this year, certainly next year, I would expect that business to rebound more towards its historic norms, but that's -- but I'm not kind of relying on that in terms of the outlook that I've described today.

(Operator Instructions) Your next question comes from Richard Ramsden from Goldman Sachs.

It's James Yaro filling in for Richard Ramsden. The first one for me is just -- if you could maybe talk about the geographic skew of the deals you're seeing across the M&A business and perhaps also the sort of size skew of those deals? Just trying to get a sense of what part of the business is improving for you, if you can comment on that one.

I think it's -- probably Europe is maybe the biggest positive surprise this year. Obviously, they've been hit by the pandemic as well so that's had a negative impact. But we've seen a pretty good level of activity there, and I think even increasing in recent weeks.

So I think whereas last year was a year when our European revenue was very soft, now that was on the heels of an extraordinary year they had the year before. As we had hoped and expected, I think this year, we'll see a very substantial rebound in the European contribution.

In the U.S., it just depends an awful lot by sector. Sector is way more important than geography. And if it's consumer, if it's health care, if it's industrial, if it's financial services of some kind, things are quite healthy. If it's energy, if it's retailing and some other sectors, it's much more of a restructuring business right now. So that's kind of how we see the different sources of revenue.

Makes sense. Maybe we could dig a little bit deeper into the European business. So obviously, that's a jurisdiction that didn't really participate in the pickup in M&A over the last cycle. So I guess how would you think about the ability for activity there to recover to levels seen maybe 2 cycles ago? And is there some sort of pent-up demand because of the lack of a pickup in activity there over the last decade?

Well look, certainly, that's my hope, and it's always been my expectation that at some point, we would get back there. You are absolutely right that if you go back to pre-financial crisis, the European M&A market was essentially the same size as the American M&A market. And for the last 10 years, Europe would need to be sort of 50% bigger just in round terms to get to the U.S. level.

So it never really recovered from the financial crisis like U.S. activity did and I think there are good reasons for that. Obviously, Europe was less aggressive in sort of combating the impact of the financial crisis, less aggressive about reequitizing financial institutions and things like that. I think the -- just when you thought maybe we might be getting back to normal, you had the surprise Brexit vote. Then that took sort of 3 years to sort of sort out what that exactly meant. I realize there's still uncertainty there to some degree.

So I think it was a little bit -- for M&A in Europe, I mean, it wasn't like there was no success. But it was -- compared to the decade before, it was very anemic. And I think now with Brexit pretty much resolved with the U.K. having a pretty strong conservative pro-business government in place -- and the U.K. is, of course, sort of a very important piece of the European M&A market. Historically, I'm hopeful that Europe will come back to its historic place of being closer to the U.S. market in terms of deal -- of market size for mergers.

That makes sense. And then the last one is more of a modeling one. Just trying to get a sense of what the minimum level of quarterly comp expense that we should be expecting going forward? So I guess sort of asking what the fixed comp expense is in the business right now? Just trying to figure out how to get to your commentary around positive profitability for the full year.

I think if you look at what we booked this quarter, I think that's probably -- it's not all fixed, but on the other hand, there are some levels at which bonuses are quasi-fixed as well. So I think that what we've done this quarter is probably a reasonable estimate of what kind of the low end of what one can accrue and still be competitive and so on, on an annualized basis.

Your next question comes from Jeff Harte from Piper Sandler.

A couple more from me. When we look at the more constructive revenue outlook for the second half of this year, how important are restructuring revenues in that outlook relative to other parts of your business?

It's certainly very important. I mean, as I said, we've grown this business a lot. And even coming into this year, pre-pandemic, it was going to be a much more significant contributor than it has been for us historically. Obviously, the pandemic really speeded that long, so now we've got retainers at much higher levels, and we've got a pipeline of completion fees that will fall at various points going forward. So yes, that's -- I mean, again, it's hard to quantify for the reason I mentioned in my script, but it's going to be certainly significant.

With that, I'm assuming -- because the restructuring is kind of where we have the least bit of visibility, I'm assuming that assumes some transaction closings as well.

Yes. And that's -- exactly, and that's why I tried to give a little bit of granular detail. It's hard to -- it's hard to kind of quantify a number. We don't want to get in a sort of segment reporting or something like that. It doesn't make sense given the overlaps of the various businesses. But yes, not every restructuring is going to take a year to close.

This is an environment where I think as much as ever where parties should want to have a quick resolution and get back out with a restructured balance sheet. So I think there's probably the prospect that some reasonable number of things move more quickly.

Okay. And on -- we've been hearing a lot and it sounds like you're saying it, too, that the level of conversations in the M&A business is actually still pretty strong or pretty good. How important are face-to-face meetings and face-to-face for like due diligence for actually getting transactions announced? I mean how much do we have to have transportation kind of wide open again before we can really see a pickup in announcement going forward?

We've seen cases, I mean, literally have done M&A deals without people even meeting, which seemed really extraordinary, but it is true and people are getting creative. And where they need to have meetings, maybe have smaller meetings with all the right kind of health protocols and things like that.

So I don't think you at all need to have the airlines restore service everywhere and people like me who is spending 3 days a week in an airport for the M&A business to come back. I think every company has adapted to a virtual world. Now obviously, there's some kinds of situations you're going to need to sort of see a plant or something, but most -- as you well know, most kind of due diligence information is in data form.

It might be a lot of numbers about historical or projected results. It might be patents, it might be trademarks, it might be copyrights, it might be formulas, it can be all kinds of different things. And frankly, you can do an awful lot of it not together. There was a day, back when I was a lawyer, 1 million years ago, contracts were always negotiated face to face, a big team of lawyers on each side of a long table, and you'd kind of hash it out.

Now many, many M&A deals happen without the lawyers even meeting. They just zing the drafts back and forth. And so I think M&A has kind of taken a step in that direction.

That's not to say that it won't, for a lot of important deals, require people getting back together again. But you should just keep in mind that there are a lot of companies out there that already know their target. They've had talks over the years. They know the management team, et cetera, and that kind of lowers the bar a little bit in terms of how much face-to-face they need.

Okay. And as we're thinking about noncomp and kind of where that kind of heads, I mean, there's something close to the kind of $15 million quarterly run rate, a decent way to think about things in the back half of the year because there were some kind of nonrecurring items in this quarter.

Yes. Yes, I think that's a reasonable way to look at it.

Okay. Thanks very much. And I think that's our last question. So I thank everybody for listening in. And stay healthy, and we'll talk to you again next quarter.