Houlihan Lokey Inc (HLI) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Houlihan Lokey Fiscal Fourth Quarter and Full Year 2017 Earnings Release Conference Call. (Operator Instructions) Please note this conference call is being recorded today, May 9, 2017.

I will now turn the conference over to Christopher Crain, Houlihan Lokey's General Counsel. Please go ahead.

Thank you, operator, and hello, everyone. By now, everyone should have access to our fiscal year and fourth quarter 2017 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section.

Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by use of words such as will, expect, anticipate, should or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect and, therefore, you should exercise caution when interpreting and relying on them.

We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-K for the fiscal year ended March 31, 2017, when it is filed with the SEC.

During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website.

Hosting the call today, we have Scott Beiser, Houlihan Lokey's Chief Executive Officer; and Lindsey Alley, Chief Financial Officer of the company. They will provide some opening remarks, and will then open the call to questions.

With that, I'll turn the call over to Scott

Thank you, Christopher. Hello, everyone, and welcome to our fiscal year and fourth quarter 2017 earnings call. Overall, this was a strong quarter for Houlihan Lokey. We reported record quarterly revenues of $257 million, 40% higher than the fourth quarter of fiscal 2016. Our full year revenues were a record $872 million, an increase of 26% over last year's revenues of $694 million.

We also achieved record fiscal year revenues in our Corporate Finance and financial advisory segments, and had our second-best year ever in Financial Restructuring. This year, we experienced an unusual market environment that led to revenue growth in all 3 segments of our cyclically balanced business model.

Our adjusted earnings per share for the quarter were $0.59 versus $0.43 from the previous year, and our adjusted earnings per share for the full year were $1.89 versus $1.46 last year.

Overall, we had the wind at our backs in fiscal 2017. We had a strong equity market; high client confidence, which helped support a stable M&A environment; and access to capital remained robust, which resulted in a good year for private equity and drove strong results in our Corporate Finance business.

This dynamic not only benefit Corporate Finance but also drove good results in our Financial Advisory Services business. In Financial Restructuring, we closed on several oil and gas transactions, and we saw a broad rebound in restructuring activity across many industries and geographies.

Now for some specific comments regarding each of our 3 business segments. Corporate Finance generated revenues of $435 million for the year, an increase of 17% over last year and our sixth year of record revenues. Our growth was driven by a 33% increase in the number of transactions that we closed versus last year. This compares to a 3% decline in the number of mid-cap M&A transactions that closed globally, measured during the same period.

As a reminder, we define mid-cap as transactions with values $1 billion and less. We continue to work to increase our market share of mid-cap transactions, and we believe we have been successful in this endeavor once again this year. Our growth in Corporate Finance for the year was driven by a strong M&A and financing market environment and the maturing of our newer managing directors, especially those who've joined us from recent acquisitions and hirings.

Financial Restructuring generated $308 million in revenues for the year, resulting in revenue growth of 52% over last year. This is the highest amount of annual revenues that our restructuring business has generated in all but the peak recession year of fiscal 2010.

Our strong results in fiscal 2017 were achieved despite the fact that U.S. and global default rates remained low relative to historical averages. Our growth in fiscal 2017 was driven by significant increases in both the number of transactions closed for the year and the average fee per closed transaction.

As highlighted on recent earnings calls, this year benefited from a large number of sizable energy restructurings, which we expect will decline in the coming quarters. We continue to have a good pipeline of current engagements, and we are experiencing continued momentum and new restructuring engagements across multiple industries and geographies. However, it is unlikely that our current pipeline and prospects for new engagements will completely offset the expected decline for the next fiscal year in energy-related restructurings.

Financial Advisory Services generated revenues of $130 million for the year, an increase of 9% over the prior year. Financial Advisory Services experienced an increase in fee events as well as an increase in the average revenue per fee event for the year. We experienced strong growth in our portfolio valuation, transaction advisory services and strategic consulting product lines. In addition, we saw good momentum in transaction opinions in the second half of the year which we expect to carry into fiscal 2018, given the current stable M&A environment.

As we enter a new fiscal year, let me highlight several factors that could contribute to our growth over the long term. On the personnel front, more than 1/4 of our client-facing managing directors have been here for 2 years or less, either as a result of recently being promoted, hired or acquired. We believe there will be continued organic growth in revenues from these new MDs as they mature on our platform.

On the geographical front, the firm has continued to deploy more resources outside the U.S. over the last several years, and our non-U. S. business grew 20% in fiscal 2017. However, our non-U. S. business still does not exceed 15% of worldwide revenues. Our growing presence in Europe, Asia Pacific and the Middle East can potentially be a factor, contributing to our growth for years to come.

On the industry front, we are still a small player in many of the industries in which we participate, and there remain several subindustry sectors where we are significantly underpenetrated given our reputation. We believe that most of the major industry sectors are very attractive for our firm as they have a large number of middle-market companies, active private equity investors and good access to capital. As is the case in most industries, there's no dominant middle-market investment banking firm, and the competitive dynamic is fragmented. It is this type of environment where we excel.

On the product front, our private financing, transaction advisory services and strategic consulting businesses are still in the early stages of growth, and we recently closed on an acquisition of an intellectual property advisory firm. We continue to look at opportunities to increase the number of products that we offer to our clients as long as they're advisory focused.

On the coverage front, we continually add to our private equity and hedge fund efforts to also include sovereign wealth funds, brokerage firms, family offices, [backs], the limited partner community and various financial legal and accounting intermediaries.

In closing, we are pleased with our financial results this year, highlighted by the fact that all 3 of our product lines produced strong year-over-year growth. However, we manage our business in years not quarters. With that perspective, we point out that our 5-year, 10-year and 15-year revenue compounded average growth rates have ranged between 8% and 13%. We will have years that we are below these rates and years that we exceed them, especially considering our business mix, which we believe is one of our greatest strengths.

The business environment has remained strong since the U.S. presidential election, and any significant reduction in corporate tax rates should have a meaningful impact on our earnings, given that more than 85% of our revenues and profit contribution is from our U.S. business. Our prospects look bright, and we will continue to do the best to be successful regardless of the business, political or economic environment that we are in.

With that, I'll turn the call over to Lindsey.

Thank you, Scott. Revenues for the quarter were $257 million, up 40% from the same quarter last year. In addition, adjusted earnings per share also increased by 40% to $0.59. As Scott mentioned, all 3 product lines performed well to close out the year, and expenses came in where we expected.

In Corporate Finance, revenues were $115 million for the quarter, an increase of 45% from the previous years. We closed 62 transactions in the quarter compared to 40 in the same period last year, and our average transaction fee on closed deals was essentially flat. This was a strong fourth quarter for Corporate Finance. But as a reminder, we are comparing against a soft fourth quarter in fiscal 2016 when a collapse in oil prices led to dislocation in the equity markets and delayed some of our closings into this fiscal year.

Financial Restructuring revenues were $104 million for the quarter, an increase of 44% from the prior year. We closed 30 transactions in the quarter compared to 23 transactions in the same period last year. And our average transaction fee on closed deals was more than 30% higher than in the same quarter last year.

Energy represented the largest sector contributing revenues to Financial Restructuring for the fiscal year, but energy across all of our product lines represented less than 15% of firm-wide revenues. As we have said in the past, we expect that energy revenues will decline in fiscal 2018 as most of the initial restructuring engagements that were signed up during the collapse in oil prices have worked their way through the system.

Financial Restructuring revenues fluctuate more than our other business lines due to fewer but larger fee engagements. And this quarter benefited from a couple of larger fees and favorable timing on closings. Because of this, we encourage you not to take any single quarter in Financial Restructuring and annualize it, or use it as a proxy for performance throughout the year.

In Financial Advisory Services, revenues were $38 million for the quarter, an 18% increase from the prior year. FAS saw growth in portfolio valuations, transaction advisory services and strategic consulting. And our recently completed acquisition in the intellectual property sector has already started contributing to revenues.

Historically, our third and fourth quarters are our strongest quarters for our FAS business, and we saw that same dynamic this year. FAS grew the number of fee events for the quarter by 11%, and also saw an uptick in average revenue per fee event for the quarter as compared to the same quarter last year.

Turning to expenses. Our adjusted compensation expenses were $164 million for the fourth quarter of fiscal 2017 versus $115 million for the same period last year. The rise in adjusted compensation expenses was primarily due to the increase in revenues for the quarter.

For the fourth quarter of fiscal 2017, we had an adjustment of $6.7 million relating to the vesting of grants that were issued in connection with our IPO, and we expect this adjustment to continue until our last tranche of pre-IPO grants vest in April 2020. This resulted in an adjusted awarded compensation ratio of 65.5% for the fourth quarter of fiscal 2017 versus 65.6% for the fourth quarter last year.

We ended fiscal 2017 with an adjusted awarded compensation ratio of 65.4%, which is within our targeted range of between 65% and 66%, and we expect to maintain the same target for fiscal 2018. We also expect that for fiscal 2018, our GAAP compensation ratio, adjusted for pre-IPO grants, will be between 125 and 175 basis points lower than our adjusted awarded compensation ratio, consistent with the 163 basis points difference that we experienced in fiscal 2017.

Our adjusted non-compensation expenses in the fourth quarter were $27 million or 10.5% of revenues versus $21 million or 11.7% of revenues in the fourth quarter last year. We had an adjustment of $2.2 million to our non-compensation expenses for this quarter, which related to costs associated with our public offering of stock that was completed in February 2017 and our acquisition of Black Stone IP that was completed in January 2017.

We ended fiscal 2017 with an adjusted non-compensation expenses as a percentage of revenues of 12.1%, and we enter fiscal 2018 with a target range of between 12% and 13% for adjusted non-compensation expenses.

Our GAAP-effective tax rate for the quarter of fiscal 2017 was 39.8%. Historically, over the last few years, our adjusted tax rate has ranged between 39% and 41%, mostly driven by our U.S. operations, which accounts for more than 85% of our total profits. As with most of our peers, we are subject to the new tax treatment for vesting shares, which came into effect on December 31, 2016, for companies starting new fiscal years after that date.

Since our fiscal year begins on April 1, and we accelerated our normal annual share vesting for this fiscal year from April to February to coincide with the public offering, the new tax treatment had no impact on our effective GAAP tax rate this quarter, unlike our peers. Since the new tax treatment is noncash, our decision to accelerate our share vesting from April 30 to February 14 had no economic impact on our business.

As of March 31, 2017, we had $300 million of unrestricted cash and equivalents and debt of $33 million. In the fourth quarter, we paid our quarterly dividend, and we made the scheduled principal payment of $7.5 million to ORIX on their outstanding note. We pay the majority of our cash bonuses to our officers in May, and we expect that those bonus payments will use a significant portion of our balance sheet cash.

As you all know, we completed a public offering of 9.2 million shares, which closed in mid-February. This offering significantly increased our public float and has resulted in an increased daily trading volume. Related to the transaction on the balance sheet at year-end, we had $193 million of restricted cash and an offsetting amount of $193 million of forward repurchase liability, and $193 million of additional APIC, which is offset by $193 million of negative shareholders' equity as it relates to treasury stock.

These line items reflect the forward repurchase contract that we entered into with ORIX at the same time we completed the offering. This contract settled on April 5, 2017, and all 4 line items in the balance sheet have been subsequently eliminated.

With that, operator, we can open the line for questions.

(Operator Instructions) We'll take our first question from Devin Ryan with JMP Securities.

A question here first on comp -- non-compensation expenses. I believe I heard the target range is 12% to 13%. And I think that's down from 12.5% to 13.5% that you guys gave on the prior quarters. I just want to make sure I heard that correctly. And then just get some perspective of whether that's just timing of expenses coming in, or a different revenue outlook. Just any perspective there.

No, I think we had originally thought we would be in the 12% to 13% range. We had some incremental costs associated with the acquisitions of Leonardo and McQueen in Europe. We adjusted them upwards. That integration continues to be very effective for us and successful. And our revenues have grown this year, I think, a little bit more than we had expected at the beginning of the year. So on a go-forward basis, we're more comfortable at that 12% to 13% range as kind of where we started.

Okay. That's terrific. Great to see. One maybe just on FAS. Nice to see fee events increasing. I know there's some seasonality there as well. But in portfolio valuation advisory, are you seeing an expansion in your client list? Is that driving some of it? Or is it just more activity with existing clients? And just bigger picture, how do you feel about the opportunity to increase, I guess, clients who are thinking about kind of the market share opportunity?

I think, yes to all those questions. We see the market continues to grow. The number of new clients that we're bringing on continues to grow. And generally, the amount of work or the number of marks that we're analyzing at any given time continues to grow. So it's really a feature of both market improvements as well as just, we continue to gain clients in a number of particular instruments that are being asked to value either on a quarterly or annual basis.

Okay, terrific. Last one, just on MD headcount and Corporate Finance. Looks like it stepped down a bit over the past few quarters. Not sure if there's anything to highlight there in terms of the drivers. And then, just how we should think about the trajectory of kind of external hiring over the next year. It sounded like the comments were reasonably constructive, but just wanted to understand that dynamic a little bit.

I think 1, 2 years ago, we did a lot of headcount growth, mostly through acquisition, some through hiring, promotions, et cetera. Did not do any acquisitions in the Corporate Finance side in the last 12 months. Still continue to do some opportunistic hirings, did have some normal promotions and had a few departures. And net-net, I think headcount was relatively flat in most of our product lines really year-over-year.

And we'll take our next question from Mike Needham with Bank of America Merrill Lynch.

So I guess, first on restructuring, I think you were pretty candid in your remarks on the outlook and how strong this quarter was. I'm wondering, how big of a chunk did the quarter take out of your active mandates. And there's still a number of things that you're working on. Or is the retainer fee run rate or whatever meaningfully lower?

No. Actually, our monthly retainer fees continue to -- be up from where they were a quarter or a year or so ago. I'd say the total amount of work that we still have in the system, whether that's engagements, pipelines, is still actually strong and in some regards, actually still higher than what we've seen in the past.

That being said, what we've continued to note is, a lot of the energy-related transactional work, we continue to close a lot this last quarter, the previous quarter. We still think there's more to close, but it feels like we're more at the tail end of working through the energy restructurings.

And at the moment, while there is broad-based other restructurings going on, there isn't another industry at the moment that is anywhere the same size and trouble that the energy patch started to present itself 1, 2 years ago.

That make sense. Okay. And then on acquisitions, you did the Black Stone deal this year. After a couple of years almost as a public company and a much higher share price, does that make it easier for you to do kind of more acquisitions or maybe a bigger deal today versus a year or 2 ago?

Well, first of all, I think all of the acquisitions we've done to date are much more small, midsize almost tuck-ins. And I don't really think whether our stock price is at $20, $30, $40 or $50 a share is influencing what we buy or how we'd structure it.

I think what has helped is being public. We're just more well-known. People are -- we get more inbound inquiries, either through intermediaries or directly from companies, and that part has helped.

But like I said, I think what we're looking for, what we're willing to buy, how we think about diligencing and structuring, isn't, at this juncture, hugely influenced by our stock price. And if we were to do a much, much larger transaction, I think we'd have different commentary to that. But at this point, it's not a driving feature.

(Operator Instructions) We'll take our next question from Conor Fitzgerald with Goldman Sachs.

So Scott, maybe just thinking to the color on restructuring. I think it's very helpful walking through kind of the pluses and minuses. And I know it's tough to get too specific, just given how lumpy the revenue line can be. But any way to help us get a sense of how much larger do you expect the decline in energy is relative to the restructuring pickup you're expecting to see in a couple of other sectors? Just any way to kind of maybe give color on the relative pluses and minuses.

Not necessarily much more than what we said before. Energy has been the largest percentage of our restructuring business in the last year or 2. It's still an important part, but by no means the largest part of the total firm's revenue stream. We clearly expect the amount of energy restructurings to come down in the upcoming quarters or year. And as we've said though, I think over the last 1 or 2 calls, we continue to see a broader base of new opportunities.

Just at this juncture, it's a little hard to tell exactly where all that nets out. But I think it's an unusual fact pattern where I think we had such a large industry go through such turmoil like we saw in the energy patch. And while there's retail and there's shipping and there's other things that continue to have issues, they're just not of the same size, at least at this juncture, to what we and our peers have seen on the energy side.

Thanks. And it would just be helpful to get your perspective. Obviously, credit normalization/credit problems are back in the investor discussion, like you talked about. Just wondering from what you're seeing on the restructuring pipeline, do you think this is part of a credit normalization? We're just coming off the lows post the great recession. Or are we actually in the start of a credit cycle that can maybe give sustained strength to your restructuring business?

I think there's been so many years now post the recession people are starting to talk about. Eventually, you would expect some kind of a downturn. You will expect some kind of credit issues. I won't say that we have seen anything yet that would be industrywide. But there's clearly far more indebtedness, high-yield debt that we see out today than there was even in the last cycle.

So why I think we've continued to be able to do well, even put aside the energy comment, is just the size of the marketplace has increased, notwithstanding that default rates are still at, I'd say, below average amounts.

We do know eventually, we'll see another downturn in the economy. Don't know how or when. But I think we'll just really try to, once again, always build the business so that we can do well regardless of whatever those cycles might be though. I think, we hear little things out in the marketplace, but nothing that I would yet note is a brand-new trend that would suggest a significant change in default rates.

That's helpful. And then last one for me. The Trump administration has talked about lowering small business taxes to 15%. Just want to get your take on what you thought the ramifications of that would be on your client base and M&A activity more broadly.

I think change is good for a business like ours, any kind of change. There are clearly going to be some winners and losers. People are going to have to reassess their values, what they want to own, how they want to finance side.

But at this point, I think, while, people are still net expecting some form of tax reform and some changes, we really don't have a large set of clients yet who are saying, "Here's exactly what I think is going to happen. And I either want to wait til that happens or I'll only do something if something happens." I think it's still in talk mode with the expectation something would happen.

But I don't really think the client base is fixated on a particular percentage or exactly how it will all shake out, and what's going to be deductible or not. And I think people are listening, but they're really not yet driving to new business decisions until they get some more clarity, I think, from the administration and Congress on what might happen.

(Operator Instructions) We'll take our next question from Ann Dai with KBW.

There were some news reports around you guys opening an office in Dubai. And I was hoping you could talk a little bit about the opportunity set you see there, and what we might expect to see in terms of some headcount and costs associated with that build-out.

Yes. We've talked about -- we've done a number of assignments in the Middle East over the last couple years. We predominantly have done it out of our London office, with personnel there. So we have talked about opening up a presence just to get closer to our client base and both, I think, in working for some of the sovereign wealth funds, working for some of the companies.

Early days on what we can continue to do in the Middle East. It'll be a relatively smaller-sized operation, at least initially. So I wouldn't expect any significant new cost factors to consider when we ultimately open up a Dubai office.

Okay, great. And earlier, you talked about the maturing of some of the newer managing directors or those that came on board with acquisitions. Is there anything that you might be able to call out for us, whether it's a certain sub-sector or geography, where you've just really seen productivity ramp?

Our acquisitions have been on the European continent and the consumer area in the tech and TMT side. So it's really been in all of those areas that we've either acquired, we've hired people really across multiple industries.

And we just know, having managed the business for many, many years, regardless of whether you acquire these senior people or you hire these senior people or even if you promote these senior people, it does take some time for them to either meld into the culture, for them to get their business cards -- their new business cards out to the marketplace.

And so we do find a ramp up that occurs, somewhere -- some people quicker than others, but somewhere in the next 1, 2, 3 years, usually is what it takes before, I'd say, we typically get to where people have fully matured on the Houlihan Lokey platform. And then they're just going to grow normally with the marketplace and with all the other services we have.

So this is not a particular location or industry or set product we'd point you to. It's just a recognition due to, I think, the large number of acquisitions and hirings and promotions that we note that -- this was across the firm was the comment of about 1/4 of our client-facing MDs are still relatively new. The vast majority of those are in our Corporate Finance area and they're still, I think, building in terms of productivity and result on our platform.

And appears there are no further questions. I'd like to turn the conference back over to our speakers for any additional remarks.

All right. I want to thank you all for participating in our fiscal year and fourth quarter 2017 call. And we look forward to updating everybody on our progress when we discuss our first quarter results for fiscal 2018 in the summer. Thank you, everyone.

And once again, that does conclude today's presentation. We thank you all for your participation, and you may now disconnect.