Earnings Transcript for GHL - Q1 Fiscal Year 2022

Operator: Good day, and welcome to the Greenhill & Co. First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Patrick Suehnholz, Director of Investor Relations. Please go ahead.

Patrick Suehnholz: Thank you. Good afternoon, and thank you all for joining us today for Greenhill's First Quarter 2022 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.

Scott Bok: Thank you, Patrick. We've continued to see a high level of client activity and our pipeline is strong. But we had a light first quarter in revenue terms given relatively few significant transaction completions. Our revenue for the quarter was $45.4 million. Our backlog suggests that, this year is likely to play out like the last few, where quarterly revenue range from the $40 million to the $140 million. Annual revenue was weighted to the second half. And by year-end we had achieved a respectable full year outcome. For this year, we expect another increase in full year revenue despite what looks so far like reduced transaction activity in the global market relative to last year. Meanwhile, we continue to remain disciplined on our expenses. That should lead to another year of strong cash flow. Investors may recall that, last year we spent $100 million on debt repayment and share repurchases. This year, we plan to focus primarily on share repurchases for so long as we believe as we do currently that our stock is significantly undervalued. Now, I will go into a little more detail on each of the points I just summarized. In terms of client activity and revenue, recent changes in the economic and market environment should increase opportunities for us in some areas, while reducing them elsewhere. The war in Ukraine may be dampening deal activity in Europe, although we still expect an increase in revenue from that market compared to what was a quiet year for us there in 2021. Offsetting that higher commodity prices should result in more deal activity in Australia and Canada, and with energy and mining companies everywhere. And higher interest rates and lower market valuations should lead to more acquisitions by strategic buyers with strong balance sheets, while perhaps reducing M&A activity by financial sponsors. With respect to financings, less accommodating credit markets will likely reduce overall activity, but should force more borrowers to access the direct lending market for their borrowing needs. In sum, at this point it looks like 2022 for us will be a year, where our historic focus on M&A advice for our historic public client base of public companies will be central to our success. At the same time, we remain focused on our three recent strategic initiatives that I spoke of frequently last year. First is expanding our coverage of financial sponsors. We made good progress on that last year, and have an important new Managing Director hire in this area joining us shortly, who will help us build on that. Second is winning more financing advisory roles. We also made good progress on that last year, and we believe that increasingly challenging credit markets will drive more clients to the direct lending market, where we can both provide access and advice. Third is our Private Capital Advisory business, where over the course of last year we built out a global capital raising team for private funds of many types, including private equity, infrastructure credit and others. That team already has a long list of funds in the market seeking to raise capital, and we expect it to become a significant ongoing contributor to firm revenue in the next couple of quarters. Meanwhile, we continue to develop the secondary aspect of this business and we have an important senior recruit set to join us in that area soon. Including him and the other senior recruit I just mentioned, we currently have 80 managing directors. Turning to our costs. Our compensation expense for the quarter at $46.8 million was slightly lower than last year in absolute terms. Obviously, the compensation ratio was higher given the lower revenue outcome. But just as we did the last past few years, we expect to bring that ratio down into our target range for the full year, as increasing revenue materializes in the next few quarters. Our noncompensation expense was also slightly lower than was the case last year and at the low end of our target range, which is pleasing given that we are starting to see increased client travel as the pandemic winds down. Our balance sheet is strong with $83.3 million of cash at quarter end, which is usually our seasonal low point in terms of cash, given the timing of bonus payments and employee stock vesting. Our debt is unchanged from last quarter at $272 million. And after repaying significant debt last year, we will continue to pause further repayments in order to ensure appropriate liquidity in our loan, which we plan to refinance in coming quarters. We repurchased $19.8 million worth of shares and share equivalents during the quarter and we have just under $55 million of share repurchase capacity remaining. We aim to use that authority just as we did last year given the pause on debt repayment. With that, I'm happy to take any questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Devin Ryan at JMP Securities. Please go ahead.

Devin Ryan: Great. Good afternoon Scott and Patrick. How are you?

Scott Bok: Good. How are you?

Devin Ryan: Doing well. I guess I want to dig in a little bit more around the outlook here and obviously expectations for another year of growth against a pretty choppy backdrop for markets and for M&A more broadly. So that would potentially make Greenhill an outlier in the year at least based on expectations in the market. And so, you spoke to kind of a changing I guess mix relative to maybe what we were looking at heading into the year. How much visibility do you have into that? Clearly, I think you're hitting on some of the sectors that it would make sense will be more active. But is that already in the backlog, or is that just where the conversations are picking up? And then, is there kind of a timing dynamic here where just given the volatile markets it's going to take time to kind of reset price expectations on kind of the negative side and the positive side? And so, that then gets you to the back half weighting for the year if you will.

Scott Bok: Well, I think based on a lot of years of doing this, I would say that unless an assignment is pretty far advanced by April or May -- you're -- if it's a large one, you're probably not going to get it done this year. So when I'm speaking about how we expect the year to play out, I'm definitely speaking to things that we're very actively involved on right now. So in that sense there is reasonable visibility. Now, which deals actually get to agreement and completion and so on, obviously, there's always uncertainty around that. But when I look at the whole backlog and focus on things that are -- have enough momentum and enough progress to date that they can get done this year, I mean that's kind of what leads to my confidence. And I'd also point out that, last year the market for sort of M&A activity grew very substantially and our revenue grew very modestly. This year, I think we can kind of maybe reverse some of that by I think quite likely having higher revenue in what will quite likely be a smaller market. So, a firm of our size that's going to happen sometimes, where you may have a year of sort of underperformance relative to the market just because your clients, your deals didn't get done or last year, we talked a lot about having a very high volume of deals, but not that many big deals. We think this year kind of is more likely to revert to more than norm for us which is skewing maybe toward larger things with larger fees in the public company realm. So that's kind of in the mix of my comments as well.

Devin Ryan: Got it. Okay. That's very helpful, Scott. Thanks. And then in terms of just the backdrop for new talent, so when things are really active, it seems like it may be hard to pull people away from their current firm. But when things slow a bit for the industry, maybe more people are open to having a conversation or moving. And so I'm curious kind of particularly if you feel like you're going to have another growth year, how those conversations are going? And just what the expectation is this year in terms of ability to really move that senior banker headcount higher?

Scott Bok: I alluded obviously to two senior hires, both of which are signed up for quite some time now, but will be announced right when they join us very, very soon. So, we do have some and obviously a number of other dialogues going on. I think it's interesting how quickly the dynamic in the market can change. I think if you looked in January of the year just a few months ago, I think most bankers at big banks were coming off a fabulous year driven by tremendous SPAC issuance and other IPOs and a huge year for leveraged lending and wondering why would it not be another fabulous year in 2022. I think that outlook is rapidly changing. The SPAC boom seems to be essentially over. IPOs are way off. Leverage lending is way off. And I suspect that as the year wears on and then into the beginning part of next year, life at the big banks, which felt I think pretty attractive last year, is going to feel much less so. And so, I think there are always people who leave for one-off reasons. We've got a couple, as I said, already signed up to join us that are in that category and many others will sort of follow in that kind of serendipitous category. But, I think the trend of more people wanting to get out of big banks will sort of revert to the norm, which is pretty significant interest in that as this year wears on and the reality of a different capital markets environment sets in.

Devin Ryan: Yeah. Okay, great. If I can just squeeze one more in here. I know with the prior earnings update you talked about Europe kind of reverting or the hope that would after kind of a slower 2021 and you're kind of reiterating that I guess here today as well. I'm curious kind of Europe is obviously -- there's maybe even more uncertainty, the closer you get to Ukraine. And I'm curious like what the drivers are in Europe right now? Is it idiosyncratic to Greenhill? Does it feel like it is, or is there something specific that you would point to that makes you feel better, I guess maybe just off of maybe a low bar from last year if that's just what it is, but I'm curious if there's any other color you can provide there.

Scott Bok: I would say my confidence there as part of the overall outlook for the firm is driven probably more than anything by just a low bar from last year and a certain number of things that have strong strategic rationale and will get done. So the team over there in all five offices in Europe is actually very busy right now. But I think you'd clearly have to say that the better markets in the world for M&A are the US, and then the ones that are actually helped by higher commodity prices like Australia and Canada. Europe clearly there's got to be uncertainty with a war on the Eastern part of Europe and the impact on energy prices there and all that. Here in America of course we're much more balanced on energy. It's going to cost some companies, but other American companies are going to make a lot of money as a result of that. So I think it will be a better year for us in Europe, but I think you'd have to be realistic and say that your biggest opportunity this year is sort of US, Canada, Australia. And Europe, you just hope to make some progress. And eventually, they'll get past the issues with the war. They'll certainly get past the energy issues and things will revert more to the normal over there.

Devin Ryan: Yeah. Make sense. Okay. Well, thanks for the update. Scott, I appreciate it.

Scott Bok: Okay. Thank you, Devin.

Operator: And ladies and gentlemen, our next question comes from James Yaro at Goldman Sachs. Please go ahead.

James Yaro: Hi, Scott. Thanks for taking my questions. Perhaps you could just contextualize the strength of the restructuring business this quarter and to what extent it contributed to results, and then what your longer-term outlook for the business is in light of the potentially weakening economic backdrop?

Scott Bok: Sure. I would not say that the year-to-date has been a particularly strong one for restructuring. I suspect you'll hear that from most of our competitors or maybe an outlier here or there that maybe had some long-term deals that kind of came to completion in the quarter maybe will still come to completion. But the default rate in the credit market is still very, very low. So, I think within -- if I think about that part of our business, which I think of as both financing and restructuring, I think the bigger opportunity is on the financing side. The direct credit market keeps growing. Those players are often displacing banks and financings for M&A deals or refinancing of existing debt. So, I think that's probably where the bigger opportunity is right now. I do think as the year goes on, restructuring activity will pick up. I don't have much doubt about that given that higher inflation, higher commodity prices, higher interest rates, tighter credit markets. I mean that has to take companies that are on the margin and put them into at least fearing a default and needing to do some sort of restructuring of their balance sheet. So in other words not a big contributor maybe, kind of, the pure classic restructuring to the first half of our year, but probably bigger in the second half. And I would suspect much bigger next year.

James Yaro: Okay. So if I just turn to your non-comp expenses they did come in better at least I think relative to our expectations on the T&E side they did come down on the T&E side quarter-on-quarter. How is that particular part of non-comp affected by Omicron? And would you expect that to drive the non-comp expenses higher over the course of the year if people are traveling more?

Scott Bok: I think probably we'll see a little bit more as time goes. I mean clearly we -- I think we nor anybody else are really back to normal business travel, but it has picked up a fair amount. Undoubtedly, Omicron impacted that right around the end of the year and coming out of the holiday period and stuff when infection rates were still quite high in a lot of places. But we have people flying across the Atlantic now for meetings and people, of course, flying around the US and around Europe for meetings. So we've already seen a fair amount of the recovery from the pandemic, but undoubtedly we'll see a bit more of that in the quarters to come. I hope we do.

James Yaro: Okay. And then just one last one. Just about the debt refinancing that you had touched on. Is there any more color you could just add in terms of whether you would expect to add additional leverage, take the interest rate down or both or sort of any other just color around that potential debt refinancing later in the year?

Scott Bok: I mean all we want to do is just be opportunistic and take advantage of whatever the right opportunities are. And obviously the credit markets were wide open until Ukraine invasion and then they kind of briefly quieted. And now we think for companies like ours it's very much open again. So we'll figure out the right moment to do that. We will certainly hope for better terms and more flexibility in different ways. Exactly what amount we refinance, we'll have to see just depending on where the market is and what we think the opportunity is for cash at that time. So really no decision made and we'll just look at the market circumstances and our own circumstances when the time comes.

James Yaro: Okay. Thank you so much for taking my questions.

Scott Bok: Okay. Thanks, James.

Operator: [Operator Instructions] Our next question comes from Michael Brown of KBW. Please go ahead.

Michael Brown: Great. Thank you, operator. Hi, Scott. How are you?

Scott Bok: Good. How are you?

Michael Brown: Good. Just a follow-up, I guess, on the debt question there. Most of my other questions have been asked and answered. But when I'm thinking about the approach to the debt here it sounds like you guys are kind of pausing the -- or you basically said that you're pausing the debt repayments and favoring the buybacks here at these current valuations. I certainly understand that. But as we're facing a rising rate environment why not aim to reduce that debt or reduce the interest expense burden and/or at least have a bit more of a balance between maybe paying down that debt faster and also buying back stock here? Just curious on your thoughts there?

Scott Bok: Sure. Well we -- obviously last year we did that. We've repaid a lot of debt. That was kind of our primary focus. We -- our debt started after our latest refinancing at $350 million. It's down about $270 million. So we have repaid quite a lot of debt. We understand that as you go to refinance from time to time that having enough liquidity in the market that you've got holders who can buy and sell that that makes it easier to do that. So we think it makes sense as we said on our last call a quarter ago to sort of pause with the debt at this level. Interest expense is not a significant burden for us. I mean it's been a trivial one really on an after-tax basis when interest rates were sitting as low as they were for a while. It's going to be a bit higher now, but still not all that meaningful. So we want to have a strong balance sheet. I feel like we do have a strong balance sheet, but we really want to be opportunistic in terms of what's the best capital structure for the firm in any given moment. And I think our shares are at least from our perspective a very attractive buying opportunity at the moment. So I think the marginal dollar which last year went toward debt repayment and now we have that down to quite a bit lower level that I think this year clearly the marginal dollar goes to buying back stock. And we'll be doing that quite enthusiastically as long as we're anywhere near where we are right now.

Michael Brown: Okay. Understood. And just one more for me. I did not see it in the press release the managing director headcount. Apologies, if I missed it or perhaps it's in your presentation and I didn't see that. But can you just let us know where that currently stands? And if you have it in front of you, how many MDs you currently have in the capital advisory business and also the restructuring business? I'm just curious where that currently stands.

Scott Bok: Okay. I mentioned just on the script. I think it may have been left out of the press release. I can't remember, if we put that in normally or not. But we have 80 managing directors including the two that I referred to that are signed up, but not quite here yet. In the capital advisory business, we have about nine or 10 managing directors. In the financing and restructuring business, we have about eight fully dedicated kind of real specialists there. Obviously, they work with all of our sector specialists and things like that as well. But for the people who like really know the ins and outs of the bankruptcy code and how to restructure debt and how to raise new financing it's -- call it about roughly 10 in that whole area and roughly 10 in the Private Capital Advisory business. And then the other 60 obviously, would be pretty much -- probably a majority of those would be sector-focused. They do probably think of themselves more as M&A bankers. But when times are tough in whatever sector they're in they become restructuring bankers. And then of course, there are some kind of people who are very much sort of M&A generalists and don't specialize by sector but play an important execution role and business development role across sectors.

Michael Brown: Okay. Great. Thanks so much, Scott. And if you had to say where the hiring is mainly focused on this stage, is it really on those sector MDs and the M&A generalist?

Scott Bok: I would say yes particularly the sector MDs and particularly in the US. I think those would be the main focus. We've added some people in not-too-distant past in Europe and in Australia. But I think our focus right now just given where I think the biggest opportunity is is probably in the US and probably in those sector bankers in part because we built out so much of the capital advisory team last year. And that's up to a good level right now in terms of the capabilities. So the sector specialists who have the ability to swing back and forth between M&A and restructuring depending on the economic environment, are probably the ones we're most excited to add near term.

Michael Brown: Okay. Great. Thank you for taking the questions.

Scott Bok: Okay. Thank you and thanks everybody for dialing in. That completes our questions and we look forward to talking to you in the next quarter.

Operator: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.