Greenhill & Co., Inc. Q3 2021 Earnings Call Transcript

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November 3, 2021

Key Takeaways

  • Positive Sentiment: Q3 revenue was $88.6 million with EPS of $0.85, and YTD revenue of $200.8 million up 17% year-over-year, with management confident in a strong finish to the year.
  • Positive Sentiment: Expansion in financial sponsor relationships and private capital advisory has built a robust backlog across M&A, financing advisory, and secondary sale mandates.
  • Positive Sentiment: Compensation costs improved, with the quarterly comp ratio at 50% (65% YTD) and plans to lower it further while increasing absolute payouts to enhance margins.
  • Positive Sentiment: Continued deleveraging with $45 million of debt repaid and $36.4 million in share repurchases YTD, plus a quarterly dividend, aiming to boost EPS and shareholder value.
  • Negative Sentiment: Restructuring advisory activity remains muted due to strong credit markets, limiting growth in that segment.
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Earnings Conference Call
Greenhill & Co., Inc. Q3 2021
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, and welcome to the Greenhill Third Quarter twenty twenty one Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Patrick Soonhals. Please go ahead, sir.

Speaker 1

Thank you. Good afternoon, and thank you all for joining us today for Greenhill's third quarter twenty twenty one financial results conference call. I'm Patrick Soonholz, Greenhill's Head of Investor Relations. Joining me on the call today is Scott Bach, our Chairman and Chief Executive Officer. Today's call may include forward looking statements.

Speaker 1

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 ks, quarterly reports on Form 10 Q and current reports on Form eight ks. 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.

Speaker 1

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 Bach.

Speaker 2

Thank you, Patrick. We reported third quarter revenue of $88,600,000 and earnings per share of $0.85 For the year to date, we had revenue of $200,800,000 and earnings per share of $0.55 Revenue for the year to date is up 17% from the same period last year. Industry data makes clear that we continue to be in a very strong M and A market globally. For our firm that is evident in the significant increase in new client assignments we have won this year relative to last year and the year before. It is also evident in the fact that on a trailing four quarters basis, the number of deal announcements with which we are associated is at an all time high.

Speaker 2

While many of those transactions were for large companies for the year to date the sizes of deals we have completed skewed toward the smaller end of the normal spectrum resulting in a year to date revenue increase smaller than that of our peers. Nonetheless, we are pleased with the progress we made in the third quarter continue to expect a strong finish to the year and are confident that our revenue going forward benefit from a reversion to the norm in terms of deal sizes and commensurate fees. On a regional basis for the year, we expect to show a stronger year than last year in The U. S. And Canada and a much stronger year in Australia offset by reduced revenue in Europe where we had particularly strong revenue year last year.

Speaker 2

By type of advice, M and A continues to be the area in which we see the most opportunity. Restructuring remains relatively slow given the strength of credit markets, but we are pleased with the progress of our new initiative to win more financing advisory assignments. In the private capital advisory area, we've made great progress in building out our global team for both primary fundraising and secondary sale transactions and both of those businesses now have strong assignment backlog. Across all our businesses, we are pleased with the progress in our new initiative to do more business with financial sponsors. With respect to recruiting, our press release notes two more senior hires in M and A, one each in Germany and Australia.

Speaker 2

We are pleased with what we have accomplished in recruiting this year and remain focused on adding more senior talent in the months to come. Now turning to costs, our compensation costs have been lower than last year in absolute terms given our objective to bring quarterly compensation more in line with quarterly revenue. Our compensation ratio of 50% for the quarter brought down the year to date ratio to 65% and our objective is to bring that ratio down further by year end while still paying our team increased compensation in absolute dollars. Where we end up in terms of compensation costs and expense ratio for the year depends as always on our revenue outcome for the year. Our non compensation costs were materially lower than last year and are running at the low end of our target range for the year to date.

Speaker 2

Our interest expense continues to trend lower given a declining debt level and continued short low short term interest rates. We continue to expect our annual tax rate to be in the mid-twenty percent range before adjusting for charges relating to changes in the value of restricted stock upon vesting. We ended the quarter with $100,400,000 in cash and $291,900,000 of debt and after the quarter end, we made an additional voluntary debt repayment of $10,000,000 During the quarter, we repurchased more than 637,000 shares and share equivalents for a total cost of $9,500,000 and in October, we repurchased an additional 194,000 shares for a cost of $3,100,000 For the year to date, we've used our cash flow to repay $45,000,000 of debt and repurchase $36,400,000 of shares and share equivalents. In addition, we declared our usual quarterly dividend of $05 per share. As I said last quarter, our principal focus is on deleveraging, but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders.

Speaker 2

Our employees currently own about half of the economics of our firm through stock and restricted stock and thus are fully aligned and trying to drive shareholder value creation in the quarters and years to come. To sum up, we are pleased with our revenue growth and profitability this quarter and we are also pleased with our progress in initiatives. Our goal is to both increase our total revenue and to reduce our quarterly revenue volatility and we aim to do that by expanding our client base to serve more financial sponsors and expanding our service offering to include more financing roles and more private capital advisory transactions. If we succeed our reduced cost, declining debt and interest expense and much reduced share count should together result in significantly greater earnings and shareholder value creation. And with that, I'll be pleased to take any questions.

Operator

We will now begin the question and answer session. And the first question will come from Devin Ryan with JMP Securities. Please go ahead.

Speaker 3

Great. Good afternoon, Scott and Patrick. How are you?

Speaker 2

Very well, Devin. Thanks.

Speaker 3

First question here, just want to make sure I heard correctly. I think you said you expect to pay

Speaker 1

more in absolute compensation, but

Speaker 3

a lower comp ratio. So I guess that would imply an expectation for revenue growth on the year, unless I misheard something in that comment. I just wanted to make sure that I kind of heard that correctly.

Speaker 2

I think that's the way the math

Speaker 3

works. Our goal is

Speaker 2

definitely to pay higher absolute compensation and we do aim to bring the comp ratio down further from where it's had at the end of the third quarter.

Speaker 3

Yes. Okay, got it. I could do the math too. Just want make sure I know that correctly. Okay, great.

Speaker 3

I appreciate that. And then in terms of

Speaker 1

kind of the financial sponsor initiatives, Scott, can you maybe talk

Speaker 3

a little more about what you guys are doing there? Obviously, we see kind of this opportunity that's only grown in the market and sponsors playing a bigger and bigger role. Particularly, as you guys have kind of a global business and are in Europe and even parts of Asia, sponsors are clearly kind of moving more global as well. So can you just talk a little bit about kind of how you guys feel like you're positioned and some of the things you're doing to, I guess, do more business with sponsors over time?

Speaker 2

Sure. I mean, I can't overstate how important this initiative is because sponsors just become an enormous part of the M and A market. And by the way, also they hand out a lot of restructuring assignments. They do a lot of refinancing. They obviously raise new funds, so there are many, many ways in which we can serve them.

Speaker 2

I think if you go back to the history of our firm, we started when there were very few firms like ours, and the competition was really all the big banks. And the big banks loved the financial sponsors, right? They really put a huge amount of effort into serving the KKRs, the Blackstone's, the Apollo's, etcetera. What's happened over time is, number one, the number of sponsors has just exploded, right? There's 25 where everybody knows the name, and there's several 100 more where they have different specialties and different sizes and different regional focuses and so on.

Speaker 2

But there's just hundreds of these things, and they're very, very active, playing a very large role, increasing role in M and A market. And so we realized that we had focused too much kind of almost exclusively on public companies. Frankly, even to serve those public companies, for example, when they want to sell an asset to this financial sponsor world or want to acquire one from that world, you know, we needed to have better relationships there. So the first thing we discovered is that we already across the firm had a lot of good relationships in the space, you know, an individual doing health care services, somebody else doing, you know, packaging, you know, they had a set of dialogues. What we did not do was coordinate well across all those people to make sure that that financial sponsor knows all the things we're doing for them, all the opportunities we're bringing, all the ideas we're bringing, all the attention we're paying.

Speaker 2

And then, of course, you want to try to get paid back for that. And those sponsors are, I think, very good at understanding the quid pro quo and realizing that if they want to have get a lot of service from us, they have to repay that, they're happy to do so. And so that's what we've done a lot of is just organizing ourselves. And then secondly, just getting all of our partners to pay more attention to that client base alongside their public company client base. And the market is so big that it's not like there's not room for another firm like ours to focus on that community.

Speaker 2

And we are really pleased with the progress we've made so far. I mean, I think even in the fourth quarter, you'll see quite a lot of announcements that will relate to that client base. So you're going to see that whether it's financings, whether it's M and A transactions, and clearly, we're building more private capital as well, you're going to see that we are definitely making a lot more money from financial sponsors kind of starting in the latter part of this year, and certainly, it should build a lot from there.

Speaker 3

Great. Maybe just one more thinking about just the backlog progression and the build by region. You gave some good color on kind of your expectations on how the full year will shake out from a regional perspective, which is a little bit backward looking. But are you seeing areas like Europe start to maybe perk back up a little bit relative I know you had a particular strong year last year, but any kind of difference from kind of a backlog trajectory by region then maybe how 2021 has been shaping up?

Speaker 2

Look, think the one outlier for us this year is that we have had less deal activity in Europe. But I think we have I think what's important for shareholders to remember is that we're not big enough to sort of track the market. We're never going to be sort of the index fund where the market goes up 25% and we go up 25. So I think, we had a very strong year 2020 in Europe for whatever reason, just random serendipity of which clients did deals and which auctions were won by whom, etcetera. It's been a much quieter year for us over there and pretty strong everywhere else.

Speaker 2

I have no doubt that our franchise is stronger than ever over there. And there are a lot of interesting dialogues we have going on. And I would absolutely expect a much better year in terms of European productivity for us next year, even if the M and A market as a whole or the European market became quieter, just because there's a certain amount of our success that's dependent on our client base and our efforts. And there's some, of course, that benefits from just a rising market. But that's the only thing really worth highlighting.

Speaker 2

I would say The U. S, we've had, we're having a solid year. And I think there's plenty of room for upside next year and beyond, given particularly this growing focus on financial sponsors as well as public companies. And in Australia, we're having one of our best years in a number of years. Frankly, I think next year will actually be better there just based on backlog.

Speaker 2

So the big swing factor for 'twenty two, I think, will certainly be Europe in a positive direction.

Speaker 3

Yes. Okay, great. I'll leave it there, but I appreciate it, Scott.

Speaker 1

Okay. Thank you.

Operator

The next question will come from Michael Brown with KBW. Please go ahead.

Speaker 4

Great. Thank you. Hey, Scott, Patrick, how are doing? Hey, Michael.

Speaker 2

Very well, thanks.

Speaker 4

Good. Good. So I just wanted to hear a little bit more about the quarter. Could you just give us a little bit of a little more insight into the key strengths there? And then your comment on the fourth quarter as it relates to the comp ratio is certainly really upbeat.

Speaker 4

So I'd also just like to hear a little bit more about what's the key drivers there? It sounds like sponsors might be maybe the key element that's really heating up here in the fourth quarter for you guys, but I'd love to hear a little bit more about that too.

Speaker 2

Sure, absolutely. I think the answer to a little more color on the third quarter and also a little more color maybe on the fourth quarter and beyond, think is sort of the same point, I think, can answer both, which is that we're this is a year for us that's characterized by smaller transactions. We have as many of sort of the blockbuster, really big, really high profile public company deals with a really big fee attached. To me that in some ways makes our result more impressive because we haven't benefited from a small number of really outsized fees. But we've had a high volume of transactions.

Speaker 2

They just happen to have been toward the smaller end of the spectrum. And so there's a lot more granularity in our numbers this year. And of course, you have that, data can be your sort of results can be less visible from the outside. So we are doing more financing advisory things, not all of them get announced. These are almost by definition not public companies.

Speaker 2

Are although some exceptions certainly, but there are the cases where people need our financing advice to go to the very large and growing direct lending market. Very often it's private companies. They don't always want to announce whatever they've done in their financing. So there are some things we're doing that can be fairly significant that are not appearing in the public domain and they're not even appearing on our website in some cases. And there are other things that are just again, this year, there's a kind of proliferation of smaller deals that may not get as much high profile attention.

Speaker 2

So I think that's why maybe the third quarter is better than what people were expecting. And I think similarly, that's what makes us feel the way we do about the fourth quarter. And frankly, even beyond that, just the increased granularity of what we're doing, more products for more types of clients and in a wider size range, I think.

Speaker 4

Thanks for that. Yes, that's helpful to understand what's really going on underneath the surface. So Scott, one thing, I'm certainly impressed with the pace of share buybacks in quarter that was certainly above what we were expecting. And I see that your basic share count has come down nicely, but your diluted share count is actually up versus the first quarter. Can you explain some of the drivers there?

Speaker 4

I assume there's maybe something related to the treasury method that could be impacting it. But is there any other puts and takes there that we should be thinking about?

Speaker 2

No, it's all that really. It's the fact that when you're in a loss position, end up focusing on basic shares outstanding. And when you're in a profit position, you focus as most companies do and we normally do on the diluted numbers. So if you look at our diluted number over time, it's very consistent. Obviously, it stepped down a lot with our recapitalization a few years ago and continued share buybacks.

Speaker 2

That explains the whole story. So I think if early in the year was obviously, in our view, least a bit of an aberration in terms of the results and revenue at a level where there was a loss. And so you had kind of a bit of peculiarity in terms of the share count. But I think if people focus on diluted, they'll see that it's been consistent and declining.

Speaker 1

Are

Speaker 2

quite active in share buybacks. We have deleveraged quite a lot, but we still think the stock is quite undervalued. So we've been buying back, frankly, as much as we can, which is a limited amount given the amount of liquidity in the stock and all the SEC rules about how you do that. But to the extent we can, we've been doing that and I expect we'll continue.

Operator

And our last question will come from James Yarrow with Goldman Sachs. Please go ahead.

Speaker 5

For taking my questions. So you've historically had one of the strongest cross border practices out there. So I'm curious how supply chain disruption is featuring in your client dialogues? And then how would you contrast the cross border versus in market M and A in both The U. S.

Speaker 5

And Europe?

Speaker 2

First of all, I would say absolutely that has been an enormous strength of our firm. We have five offices each in Asia Pacific, Europe and The U. S. We have a very collegial culture and people work together extremely well across borders on cross border deals. So that has been a strength.

Speaker 2

I think kind of for the same reason I just gave a minute ago about kind of a tendency towards smaller transactions this year than in a typical year for us. There have been fewer of the big blockbuster cross border deals that can generate huge fees and a high profile. But there's been plenty of smaller transactions that are cross border between all of our different geographies and offices. And I have no doubt that the larger ones will come back. They always do.

Speaker 2

It's just kind of random as to which years they tend to fall into some degree. But that's a very, very important part of our business. And frankly, in the financial sponsor world, I think it is a little bit of a differentiator for us. I mean, there are firms that focus almost entirely on the sponsor community, but are much stronger in one market, often The U. S.

Speaker 2

Market, and have less reach globally, and we have a lot of that. So I don't think you'll see in our numbers sort of the huge impact of the cross border deals that you maybe have in years past, but there certainly are some really important ones there. And I think there will be more in the fourth quarter and more as the year go on.

Speaker 5

Okay. That makes a lot of sense. And then we've talked about, obviously, one of the macro risks to M and A in terms of supply chain disruptions. But one of the issues we've heard from peers is that there's this micro bottleneck in terms of service providers, specifically lawyers and accountants hitting capacity constraints in terms of deals and this may be impacting the timing of deals. Is that something that you're seeing?

Speaker 5

And could you characterize characterize the the impact impact if if you you are are seeing seeing it? It?

Speaker 2

Yes, I agree that supply chain disruption generally in the economy is not a big problem for us. I mean, that's a bit of a high class problem in some ways that corporations are making such great profits and that drives more deal activity. And if they're running out of certain supplies, that's probably something that gets solved over time. For us, yes, I would agree. We have seen cases where accountants seem almost too busy to do maybe due diligence as part of a deal or something.

Speaker 2

But it's I would not call it a significant factor. Mean, you kind of hear about it here and there and sometimes there's some question or some maybe some minor delay or things like that. But M and A volume, obviously, has been running very high. We've had more transaction announcements in the last twelve months than we have in any other twelve months. And people are finding a way to get it done.

Speaker 2

I mean, that's one thing I think that is certainly true of investment bankers. I think it's equally true of lawyers that they're not going to turn away the incremental attractive project. They're going to find a way to get it done. Obviously, it can mean burning the midnight oil in some cases, and it can mean trying to work in a more efficient way and clients have to kind of speed things along more than they might in more relaxed environment as well. But I wouldn't think it's a real constraint on our earnings capability, at least at this point.

Speaker 2

And if it did get there, would probably be a high class problem in the sense that there'd be so much business that we'd probably all be pleased to take a bit of a breather before taking more on.

Speaker 5

Absolutely, that makes a lot of sense. And then my last one is just if you could just sort of characterize the restructuring environment you're seeing today. Has it picked up at all off the lows? Or does it continue to sort of remain quite muted?

Speaker 2

I think restructuring has remained quite muted. I think I was certainly one of the early people saying this very early this year already that last year, of course, was restructuring boom and there were a lot of deals that carried over that got, you know, carried into this year and got done in most cases probably earlier in the year. But that in the credit markets are just so strong that there has not been a lot, there's some still, of course, but not been a lot of restructuring activity. But for the very same reason that strong credit market is driving wonderful financing opportunities across the direct lending market. And I'm sure you listen to the earnings calls for the Apollos and KKRs and Blackstone of the world, they are putting out enormous amounts of credit.

Speaker 2

And our clients can access that credit, and we can help them do that. And so are the people who last year were working on bankruptcies for us, in many cases this year are working on financings across the table from those same parties that they were working with on bankruptcies in the midst of the pandemic.

Speaker 5

Okay. Thanks so much.

Speaker 2

Okay. Thank you. Thanks everybody for joining and we'll speak to you next quarter.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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