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Greenhill & Company Inc. (NYSE:GHL)

Q4 2012 Earnings Call

January 23, 2013 04:30 AM ET

Executives

Chris Grubb - CFO

Scott Bok - CEO

Analysts

Howard Chen - Credit Suisse

Brennan Hawken - UBS

Devin Ryan - Sandler O'Neill

Joel Jeffrey - KBW

Steven Schuback - Autonomous Research

Douglas Sipkin - Susquehanna

Operator

Good day and welcome to the Greenhill & Company Fourth Quarter and Full Year 2012 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Chris Grubb, Chief Financial Officer. Mr. Grubb, the floor is yours, sir.

Chris Grubb

Thank you. Good afternoon and thank you all for joining us today for Greenhill’s fourth quarter and full year 2012 financial results conference call. I am Chris Grubb, Greenhill's Chief Financial Officer, and joining me on the call today is Scott Bok, our 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 these forward-looking statements.

For 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, Chris. As you can tell from our press release, there are number of things worth highlighting today. We had a strong fourth quarter in terms of advisory revenue and we finished the year with increase in momentum in our advisory business. Given that our only business is advising clients that will widely be the primary focus of our comments today. But you'll also hear that we accelerated the monetization of our remaining principle investments, both because of what we saw as an attractive offer and because we felt that was a good opportunity to significantly increase our share repurchases.

There are also a couple of unusual items to highlight in relation to our tax rate and share count. But let me start with what’s most important, which is the advisory business.

As we look at our full year result, it’s clear that 2012 is best understood as comprising two very different halves. The first half was highlighted by continued weakness in global transaction activity and our first half results were reflective of that. Then around the middle of the year we saw what we believed to be the beginning of a significant potential recovery in transaction activity and we highlighted that on our second quarter call.

The improvement (inaudible) became clear on the fourth quarter which represented the strongest M&A market in several years, in terms of general transaction activity and our strongest advisory revenue quarter since 2007.

But the full year still ended with the further declines in both global announced and completed transaction. Against this backdrop we're pleased with our financial results for the fourth quarter and for 2012, and are encouraged by the number and size of transactions we announced to the firm over the last several months. Including many significant transactions that are scheduled to close in the first half of 2013.

Our advisory revenue for the quarter was up approximately 17% over the fourth quarter of 2011, improving our full year result to a modest decline of approximately 4% compared to 2011. Our total revenue was down even less than 3% on a full year basis, benefiting from slightly better performance relative to 2011 in terms of the revenue impact of our remaining principal investments.

For the fourth quarter, our pre-tax profit margin improved to 31% and on a full year basis our pre-tax profit margin improved to 25%. Even with the weaker transaction environment and slightly lower full year revenue, we managed to achieve slightly higher pre-tax profits for the year when compared to 2011. However, due to a onetime increase in our tax rate during the fourth quarter which Chris will discuss in more detail.

We had earnings per share of $0.50 down slightly from $0.53 from the fourth quarter of 2011, and for the full year we achieved earnings per share of $1.38, which is down slightly from $1.44 per share last year.

We see 2012 as a good year in terms of what we have consistently listed as the four main objectives for our firm. One, to increase our market share of the global pool of advisory fees. Two, to consistently achieve the highest profit margin among our closest peers. Three, to maintain a strong dividend policy. And four, to maintain a flat or even declining share count. I will focus on the first of those and then turn it back to Chris for the others.

In terms of increasing our market share, our full year 4% decline in advisory revenue compares well to 14% decline in the volume of completed M&A transactions globally for the year. As of the third quarter, the aggregated advisory revenue for our nine global large bank competitors was similarly down 18%. Recent fourth quarter reports suggested full year decline for this group will be somewhat lower than that, but still considerably worse than our 4% decline.

You will recall that this trend of our growing advisory revenue faster than the nine large banks which are our primary competition has been in place for some time. Coming into 2012, we have grown our advisory revenue of 39% over the preceding three years, while the aggregate advisory revenue of the big bank group actually fell 17%. Once all the 2012 data is disclosed, we believe the four year comparison will look even more favorable for us.

As we think about the key drivers of our strong relative performance compared to the nine large global investment banks, we believe our client focused and conflict-free advisory model continues to differentiate us and to enable us to attract both new clients and talented bankers away from our large competitors. Building on this advantage, we continue to focus on developing a business that is diversified by geography, by industry sector and by type of advice. In terms of geographic diversity, North America and specifically the US M&A business was the strongest performer for us by far this year.

Our European revenue was very similar to the prior year as a result of continued economic and market challenges there. Australia was down meaningfully, consistent with weak domestic M&A market trends locally, following a very strong couple of years from that market. But despite a challenging year, our Australian business, which we acquired in 2010 achieved its first earn out hurdle during the fourth quarter.

This hurdle measured revenue performance over the first three years since the date of the acquisition and the early achievement of this goal highlights the strength of our presence in that market and the success or integration of that team into the (inaudible) firm. By industry we're showing good breath, as listed in our press release we completed 15 transactions in the fourth quarter across a range of industries and this industry breath combined with what we showed in the first three quarters also reflects the range of industries that are active in our pipeline of ongoing advisory assignments. Specifically, industrials, technology, healthcare and energy, all are quite active.

In contrast, financial services activity continues to look relatively weak, down from its very strong contribution throughout most of our history. Lastly, in terms of assignment type, in 2012 we continued to display our ability to generate significant revenue from sources other than traditional M&A completion fees, with financing and restructuring advisories, special committee assignments, fund placement assignments and a record level of retainer fees all contributing meaningfully.

The contribution from financing advisory and restructuring roles was particularly strong in Europe, and the capital advisory or fund placement business ended the year with approximately flat results for 2011. But with an improved backlog of assignments entering the New Year. Within the traditional M&A business, revenue from higher probability sell sides outweighed by side roles by a significant margin.

The foregoing comments largely relate to our performance relative to the market, and relative to our competitors, so let me add a few comments on current market activity in our performance in absolute terms as well. On our second quarter call, I signaled what I believed was a turning point in our level of activity. And since that call our transaction announcements have played out essentially as we expected then.

During the fourth quarter, our momentum continued, while the overall M&A market increased meaningfully as well, signaling the broader recovery we expected in market activity levels maybe taking shape as we move into 2013. While it's too early to predict how the full year will develop, one thing we can say for certain is that our revenue pipeline from announced impending transactions for this year is significantly stronger than it was at this time last year. In some, we feel very good about developments in our business, it's clear that ever the clients have increasing concerns with the conflicting interest that are inherent in the universal bank model, and thus returning to firms like ours for advice in a variety of matters. The only major firm that is entirely focused on the client advisory business and has a strong presence in each of the largest markets for transactions activity, that have deep experience in almost every industry sector and then now has 17 years of building a brand, we're well positioned to benefit from that continuing trend. Now I'll turn it over to Chris.

Chris Grubb

Thank you, Scott. I'm going to cover six topics today. Compensation cost, non-compensation costs, our tax rate and update on the continuing liquidation of our remaining principal investments, the Australian earn out and dividends and share repurchases. Let me start with compensation.

As we have commented previously, our goal is to achieve a compensation ratio that's the lowest among our close peers. In addition, in absolute terms we aim to be below 50% consistent with our first several years as a public company, driven by revenue productivity per employee that is the best among our peer group. Given the continued challenging transaction environment during 2012, our advisory revenue per employee remained under pressure and negative revenue from exiting our residual investments further impacted our total revenue per employee.

As a result, in the fourth quarter and on a full year basis, we had 53% ratio of compensation to revenue, which is above our targeted level. Thus, still far below the lowest GAAP compensation ratio among our closest peers. Our objective is to drive this ratio lower overtime, as the overall transaction environment and our resulting revenue productivity improves towards historical levels.

Provide updates on some statistics we've previously discussed on these calls. Despite hiring a number of significant senior bankers during 2012, we ended the year with just 2.5% growth in overall headcount as we remained very focused on revenue productivity per employee. Like keeping our headcount about flat and keeping the amount of our differed compensation similar to past years, we expect our fixed compensation cost consisting of base salaries and restricted stock amortization for 2013 to be broadly similar to 2012’s level.

As we look at our pipeline of recruiting opportunities, we expect to grow headcount again in 2013. But the rate will depend on both conditions in the deal market and specific recruiting opportunities. We will provide updates as the year develops.

Turning to our non-compensation cost, our fourth quarter non-comp cost were $15.3 million, approximately flat with the second and third quarters of 2012. Similarly, our full year non-comp costs are unchanged from 2011 results.

Looking ahead, there are obviously some bearing (inaudible) each quarter, but we do not expect our full year non-comp expense for 2013 to be up meaningfully over 2012 levels.

Next, let me touch briefly on our tax rate. For the fourth quarter, our effective tax rate was 46% by far the highest in our history, driven by non-deductible capital losses relating to the sale of our interest in GCP Europe and some Iridium shares we hold in our European subsidiary.

For the full year, our effective tax rate was 40%, also the highest in our history, driven by both the non-deductible capital losses and by the unusual concentration of earnings within the United States, a relatively high tax jurisdiction during 2012.

Looking forward, we expect our effective tax rate to be in the 35% to 37.5% range that prevailed throughout from 2005 through 2011. Looking our principal investment activity, we made further progress during 2012 and specifically during the fourth quarter, forward liquidating our investment portfolio and returning that proceeds from those realizations to shareholders.

December we sold our entire interest in GCP Europe for proceeds of $27.2 million which represented sale price of approximately 90% of book value, near the high end of the range of comparable secondary market transactions, while we recorded a realized loss of $3.4 million in the fourth quarter at the time of the sale.

This transaction accelerated our realization of cash and also eliminated our only significant remaining financial commitment to future fund investments. The sale of GCP Europe represents our third sales private equity interest since exiting the merchant banking business in 2010.

In 2011 at the time of our sale of our interest in Greenhill Capital Partners II, we entered into a one off put agreement with the purchase for two of the underlying investments sold as part of that transaction. That put was exercised in December 2012 and we thereby acquired interest in two portfolio companies for $15.5 million.

Those interests have fair market value of approximately $11.3 million. However, there is only a modest impact on our fourth quarter earnings as we had previously recorded valuation changes in those investments on a quarterly basis since the time of the sale.

On previous calls we explained that we had entered into a 10b5-1 program for the disposition of our Iridium shares over a period of approximately 2 years or longer. The program continues to be executed exactly as planned. During the fourth quarter we sold 855,000 shares in the average price of $6.49 per share for total proceeds of $5.5 million.

For the full year, we sold 3, 850, 000 shares at an average price of $7.91 per share for total proceeds of just over $30 million. In sum our principal investments generated fourth quarter loss of $8.1 million reversing a small gain through the third quarter and bring our full year loss on our principal investment portfolio at $6.4 million.

The losses were driven by a mark-to-market loss from a decline in Iridium share price and from declines in the value of our merchant banking funds, including the realized loss on GCP Europe as discussed just now.

We ended the year with investments valued at $51.1 million, which included both our remaining Iridium stake valued at approximately 34.2 million, our limited partner investments in our previously sponsored and other funds of $16.9 million.

Before discussing dividends and share repurchases, we want to briefly explain the impact of the Australian earn out on our share count. As you may recall, a portion of the purchase price from our 2010 acquisition of the Australian business was dependent on the Australian business exceeding certain revenue hurdles over a five year period. The first test was accumulative revenue over the first three years and that hurdle was achieved in December, one quarter early.

At that time our share count for accounting purposes increased by 659,000 shares, which is fully reflected in our year end share count. However, those shares will not be issued or start earning dividends until April 2013, which is the third anniversary of the transaction. Finally, on the topic of dividends and share repurchases, our dividend this quarter is $0.45 per share consistent with the last few years. During the quarter we also repurchased over 855,000 shares of our common stock and average cost of $49.59 per share, for a total cost of $42.4 million.

A significant portion of the total repurchase amount was funded by the liquidation of our principal investments during the quarter and the rest was funded by ongoing advisory business. In sum, we're able to repurchase sufficient shares this quarter to more than offset the dilution from the Australian earn out being achieved. For the full year we repurchased almost 1.9 million shares at an average cost of $43.85 per share, for a total cost of just over $83 million.

Taking a longer view, it is noteworthy that despite the significant Australian acquisition and continual grants of equity (devote) new recruits and existing employees as part of our annual compensation. We continue to maintain a share count as effectively flat with our 2004 IPO share count, which compares very favorably to both our large and small competitors and we have accomplished that while continuing to maintain a balance sheet for the net cash position. With yearend cash at $50.3 million and debt of $29.1 million.

Our board of directors has authorized the repurchase of up to $100 million of our common stock for 2013, given that we have monetized much of our investment portfolio. Moving forward, the funding for share repurchases will obviously come primarily from cash generated from the advisory business. Now let me turn it back to Scott.

Scott Bok

There obviously a fair amount of details we've gone through today, so let me conclude just a few summary comments. For the near term we feel very good about our business. After five challenging years there appears to finally be some meaningful pickup in transaction activity, by keeping our cost including deferred compensation under control and aggressively buying back stock, we've tried to maximize the firm's operating leverage in a better revenue environment. That way if transaction activity and revenue continue to rebound, shareholders can more quickly see higher profit margins and higher earnings per share and employees can more quickly see higher personal compensation.

For the medium to longer term we feel even more positive for two reasons. First, the trend of major companies seeking advice more often from firms like ours and less often from large global banks remains very much in place. We often look at the aggregate advisory revenue of the nine large global banks compared to ours, but it's even more interesting that not a single one of those banks has bucked that trend over the last three to four years, ours is clearly the better business model for the business of advising clients.

Second and equally important we continue to expand and upgrade our talent pool. Over the course of 2012 you saw us recruit a number of very high profile bankers with various areas of expertise and in various regions. We expect you'll see more of that in 2013, in fact you already saw one in January.

At the same time we are increasingly focused on developing our own talent. You see that evidence by three promotions to Managing Director announced in today’s release and we expect you'll see much more of that to come as well.

With that we are happy to take any questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) The first question we have comes from Howard Chen of Credit Suisse. Please go ahead.

Howard Chen - Credit Suisse

Scott, when you were asked last year about the impact of the US election in the fiscal cliff debate by me and others, you were fairly consistent that Greenhill hadn’t seen a material that is a material overhang on activity and or your backlog, and we certainly saw the revenue carried through. I'm curious, now that we're passed those issues, are you seeing any change in mentality positive or negative from your clients?

Scott Bok

I think certainly nothing negative. I think I'd still feel the fiscal cliff didn’t seem to be weighing too heavily on major corporations for strategic activity. We obviously had strong last six or seven months the last year in terms of deal announcements. I think we feel just about the same about the business today that we felt about it over the last six or seven months.

Howard Chen - Credit Suisse

Okay great and maybe it's the follow up on that. So what would you say is really, if you are to pinpoint on one limiting factor to a product pickup an activity from your clients, what would you say that is?

Scott Bok

I think it's broadly beyond the US to other parts of the world. I mean, our US business feels very-very healthy right now. If Europe followed on that same path, the way I think it's fair to say it has in past cycles over the last 30 or so years that I've been doing this. I think you'd see materially better results, not just from us but across comparable firms. So it’s not that we need huge more improvement in the US, we just need that really to broaden out to the rest of the global markets.

Howard Chen - Credit Suisse

Okay, thanks. And then there have been a lot of reports out in the press with respect to larger LBOs and a pickup in financial sponsor activity, just curious, what you think about the firms positioning and opportunity set, if we do seem an M&A upturn that’s led by the financial sponsor community. Is that something that you would expect to kind of consolidate revenue share gains and nor be at place that you want to invest more heavy in. Thanks.

Scott Bok

I think the biggest opportunity for us there is frankly working on the other side of those private equity funds, what we will occasionally find ourselves with one of them is a major client. But if you look back to 2007 which was obviously the pick of private equity activity and also the peak of our revenue, you saw we had a tremendous number of very large transactions where we were on the sell side. And why is that, I think that’s because of boards get particularly nervous about using a big bank as advisor if they are doing a transaction with one of the major private equity funds that are so close to those banks. The fact that we’re almost always on the sort of the big corporate side it makes us a more independent advisor over that kind of situation.

Howard Chen - Credit Suisse

Okay, thanks. And then just finishing on the hiring environment, given what you’re seeing real time on the competitive landscape for human capital, you touched a bit on this in your prepared marks Scott. Can you just provide a sense of what you think would be a reasonable pay case for partner hiring in 2013 for Greenhill?

Scott Bok

I would say maybe not that differed from last year. I mean I'd probably be disappointed if we ended up with fewer than five and I think it’d probably take a lot of effort to get to more than ten. So, call it somewhat in that bracket I would think seemed reasonable.

Operator

Next we have Brennan Hawken of UBS.

Brennan Hawken - UBS

Question on the environment and how you balance that with compensation ratios and what your thoughts are around, obviously what is pretty high fixed comp cost ratio as the percentage of total comp? How is it that – we’re seeing a lot of the (bullish) bracket firms reducing their comp ratios rather meaningfully and include and see lot of movement on your comp ratio here and I think a lot of that probably has to do with on the fixed comp cost proportion there.

Is it environment like this making you rethink your strategy of having such a large piece of your comp fixed? And how do you balance out the opportunity to higher more folks versus putting even more upward pressure on that fixed piece of the comp puzzle?

Scott Bok

I think with any luck I'm probably done worrying about fixed compensation cost at this point, because we’ve always said as revenue expands and the market gets better - whenever didn't give - I never even thought of the (inaudible) fixed compensation cost until really the financial crises came.

Until then there was always an up revenue that you simply multiply by your comp ratio and paid people out, the difference between that and the base salaries and RSU amortization they've had. So I think hopefully we're headed back for that role where we don’t have to focus on it.

But again what we have done through the financial crisis, I actually felt pretty good about what we have done. I mean, we have a dramatically lower GAAP compensation ratios than our closest peers.

And you can look at Goldman Sachs; yes they brought their ratio down quite a lot. But Goldman Sachs should have a much lower compensation ratio than us. They have, if you just look at the balance sheet, divided by number of employees; they had a lot of capital each one of those employees brings to work every day.

You know our guys get a – that’s going to (inaudible) the telephone and that really is the capital they put to work. So I don’t think it’s realistic that we would ever want to go, kind of as low as Goldman, but we don’t have to worry about sort of capital charges and things like that.

So yes we have been a bit above 50% through the tougher parts of the financial crisis in the aftermath. But, we still feel quite good about getting back to below 50 which I think will look very-very good by comparison to others, as markets get a little bit better.

Brennan Hawken - UBS

Okay cool. And on that revenue recovery seam, I know we're just sort of barely into the new year but you know kind of ran by week completed announced volumes and from the public data it looks like things sort of little verses back furious pace approaching year end. Is that to be expected, how does that look from your perspective?

Scott Bok

I think that probably just random noise really, I don’t - it’s not like all deals close right at year end. Yes there was a flurry of activity and a lot of deals getting announced, even right in the face of all the worry about the fiscal cliff and so on. You know we still feel like there is quite a lot of momentum and really haven’t felt any – of course there's going to be an even flow of announcements, so we haven’t felt any change in - say January versus October through December.

Brennan Hawken - UBS

Okay. That’s helpful, thanks. And then a last one from me; can you give some color on what you have seen in the conversion rate on deals and maybe how that's changed when you look at the percentage of deals completed recently versus six to nine months ago? And what you attribute that changed to?

Scott Bok

I think that the conversion rate which is obviously something that is not easy to measure on a price high spaces, because we have so many deals, the different stage at any given time. But clearly what has happened in the US market at least is just the pace has picked up. Companies know what they want to do; they're focused on doing it. They're moving more quickly.

And you know and frankly ours is a business where you have kind of the odd phenomenon of maybe having less capacity utilization when the business gets quite good, because deals happen in three or six months instead nine or 12 or 18 months. So I think clearly there's been a pickup in terms of the pace and the probability of starting with an assignment and getting to a completed deal in the US, and hopefully we'll see that spread to year up announcement as we go forward.

Operator

The next question we have comes from Devin Ryan of Sandler O'Neill

Devin Ryan - Sandler O'Neill

Pretty good. So you've been talking in the last couple of quarters about having significant retainer fees and retainers being kind of a bigger piece of advisory fees. And I just want to dig into that a little bit, is that because you just have more deals and then you guys are working on more today, so that's just the nature of that phenomenon? Or they're actually some change occurring where deals are being structured more towards retainer nature and really I'm asking because when we think about modeling your revenues, should we be assuming that maybe a higher level of fees or something been pulled forward into earlier quarters because that's going to be netted back against when a deal closes. So, just trying to think about that comment and then really from modeling perspective as well.

Scott Bok

Sure, I would say we haven't seen any material change in the way M&A fees or structure. There's often some kind of a retainer, but it’s really not much different. I think our retainers have gone up for two reasons; one is that we just have more activity and therefore you get more of those and make as small retainers. But secondly, and probably more important we're seeing more transactions of the non M&A variety where it's some of the financing advisor or restructuring advisor, some other kind of role where the retainer is more important element of the compensation. So I probably wouldn't change whatever my modeling was for M&A fees on a particular deal, I'll probably wouldn't change that going forward, now I would focus more on the non M&A's the thing that's driving the retainers a bit more.

Devin Ryan - Sandler O'Neill

Okay great, thanks for the color. And then just on the fund placement capital advisory business, I know you don’t like to give specific breakdowns of contribution, but I think you had said that this year would be more fourth quarter loaded in terms of the contribution from that business. So just want to get a sense of maybe just generally, was that the case? Was it a bigger contributor this quarter than it maybe had been in recent quarters and then just any update for what you're seeing in terms of traction of that business and I guess your outlook more generally?

Scott Bok

First of all, I would say it was a very-very similar contribution that showed last year. I think we've shown in our press release, it was 9%, I think it was 9% last year, so that is the case. Yes it was fairly back and loaded, it's only the fourth quarter was by far the biggest of the four for those.

We continue to feel quite good about the development of the business, obviously we're disappointed that it hasn’t picked up even more and faster. But we've got a great franchise there; we have a long list of assignments that we're literally in the market with right now. So I think as institutional investors return to illiquid longer term alternative investments as we think they are doing, as the (bond) rates are very-very low and equity markets and the public markets are up quite a lot. They naturally return to the other asset classes. So we think it will ramp up overtime, but for the year it was roughly the same as last year.

Devin Ryan - Sandler O'Neill

Okay great. And then just lastly, why was the lost on the European investments non-tax deductible?

Scott Bok

It’s very simple and it relates just to the fact that we don’t have that many European investments and to have anything to be taxed, it's frankly kind of like your personal return if you have capital losses, you can offset them against capital gains. But we at a corporate level, you need to offset them against gains in the same jurisdiction. We had lots of gains, hundreds of millions so I think overtime of gains in the US market from the days when we were very active in the private equity investing business. But we did very little in Europe and the ones significantly we did do we lost a bit of money on, so it become kind of orphan loss that you have nothing to offset it against.

Operator

Next with Joel Jeffrey of KBW, please go ahead.

Joel Jeffrey - KBW

I just got a just follow up on Devin’s question a little bit, just to make sure that I understand. What exactly would have been the tax rate had you not had the non-deductible loss? Maybe you're looking at sort of that 36% tax rate or would it been more sort of about 40% tax rate?

Scott Bok

It would be in the range that Chris gave which is what we had for five years and we expect we'll have again, which is sort of the 35% to 37.5% I think he said. So it had a meaningful impact.

Obviously what was also a factor, I mean it’s important I think to focus on this as well, I mean the reason it would still have been a reasonably high one, so there is no question as you can tell from all our (inaudible) that we had an unusual concentration of our profitability in the US market, which I think most people know is about the highest corporate tax jurisdiction in the world.

Joel Jeffrey - KBW

Okay. And then just sort of thinking about how next year is shaping up, if you do look at the public database it looks like first quarter shaping up to be particularly strong. Just wondering if you’re seeing deal flow that’s going to sort of continue that strength further in the second and third quarter? If any comments you can give on that would be great.

Scott Bok

As I said, I don’t want to sort of tag one, particularly we're seeing things are going to close or even more so when we think things are going to get announced, but I do feel like the pipeline of kind of invisible activity. The stuff that obviously is in public gap, but just the dozens of assignments we’re working at any given time. And we feel like that’s about as good as that has been for the last six months. So certainly everything we can see now, we’re not thinking we had sort of a blip of a couple of quarters and all goes sour. We actually feel pretty good about our business going forward.

Joel Jeffrey - KBW

Okay and just lastly, in the press release you mentioned that one of the areas that was done meaningfully this year was the financial services space. Are you seeing any kind of rebound in that activity and if not what do you think is kind of holding that back?

Scott Bok

You know, I think that from what we've done, some things had some great success actually on the insurance side, the bank side of the business as I think a lot of observers have said. Until there is more clarification on the capital rules, the other regulations, Dodd-Frank, all variety of things, you know there is just not going to be as much bank M&A activity as there is the most points in the (inaudible) concerning most points of the last 10 or 15, 20 years. So insurance continues to be reasonably active, but that whole bank area is just not as active as it has been, and now I don’t think we’ve seen a big change in that since the last few quarters.

Operator

Next we have Steven Schuback of Autonomous Research.

Steven Schuback - Autonomous Research

Looking at the year-on-year trend, it looks like the non-personnel expense at least continues to rise on a dollar basis and which I guess one would expect given the strong growth in headcount, but I guess even when looking at on dollar per employee number, it looks there've been non-comp is continuing to creep a bit higher and staying above the 190,000 level. And I guess I was just hoping based on your guidance and cost and headcount, would it be fair to assume that the non-personnel cost will stay at that 190,000 level give or take?

Scott Bok

I mean the way - obviously if you hire lots of people you need more office space, you need more travelling, you need you know IT terminals and things like that. But we actually think in a shorter term sense of non-compensation cost as largely fixed. So our figure just to be clear for the year was literally $100,000 higher than it was last year and as we indicated in the script we actually and it looks like it’s going to be that different for 2013. So none of that surprises, I think I said in our first quarter call in 2012 that yes our non-comp was up a little bit, but when we thought for the full year 2012, it would be just about like 2011, which is in fact out played out. So we kind of still feel the same way we did then, we did a big office build out, we added a lot of offices, we expanded office space in New York and London and Tokyo, but now that we've done that, it's going to be a while before we need to do another big round of expansion that will ramp our non-comp costs.

Obviously, we could have something unforeseen, we could have a big opportunity of another new office to open, but just with our business as it is operating today we feel like our non-comp is going to remain pretty flat in fixed terms.

Steven Schuback - Autonomous Research

Okay, that's very helpful, thank you. And I guess just in terms capital management, clearly you have a strong track record of being effective stewards of shareholder capital and have maintained that flathead share count for the last few years. I guess what I'm trying to do is reconcile given the reduced pace of the portfolio sales that Chris had alluded to, as well as the - I guess somewhat elevated dividend payout ratio for the moment. How should we think about some of the liquidity constraints impacting the level of buybacks?

Scott Bok

The $100 million buyback target for 2013 is obviously reflective of our feeling reasonably good about the advisory business, we have some more asset sales going on, but the bulk of the money of the buyback is going to come from the advisory business. Keep in mind that when looking at our cash flow you have to take the net income and add back all the non-cash compensation, so while our dividend payout ratio relative to the earnings per share is fairly high, if you look at relative to our full operating cash flow it's actually not that high. So if we continue to see improvement in the transaction market, we think we're going to continue to be both be significant buyers of our stock and continue to maintain a balance sheet that has more cash than debt.

Steven Schuback - Autonomous Research

Okay and then I guess last question is - I guess regarding your outlook for Europe, clearly it's been a pretty challenging revenue environment which you already alluded to. At the same time it looks as though based on our discussions of clients and some recent trends that, I know there're areas to that where we're seeing I guess signs of improvement and I just wanted to get a sense of, I guess what your thoughts are on the outlook for 2013, particularly in the revenue environment there?

Scott Bok

Sure, I mean, I'm in luck after five difficult years, just start being the make ball predictions about big upturn in Europe, but yes we're foreseeing some very good assignments as well. We entered the year with a couple of big things that were pending out of Europe and there are plenty of others we're working on, so I'm certainly very hopeful that we will see a much better 2013 in Europe than we did in the last few years.

Operator

Next we have Douglas Sipkin of Susquehanna. Please go ahead sir.

Douglas Sipkin - Susquehanna

Thank you. Good afternoon guys, how are you doing?

Scott Bok

Great. I thought we lost you Doug. I am glad you're still till the last question here.

Douglas Sipkin - Susquehanna

Yeah that’s good. First of all I want to congratulate you, your forecasting is pretty good, pretty close based on what your guidance was, I think it was like May, so impressive. Then you should be in our seats. Second question just a follow up with the buyback question. I mean, I guess what I am thinking, is that 100 million for 2013 or could it be 2013 and beyond because I'm just trying to think with some of the liquidations that we've seen maybe there were line shifting a little bit more to the core ops, maybe would slow down a little bit. I'm just trying to read through that comment.

Scott Bok

We think of - easy as to think about share repurchases on an annual basis. Obviously, we didn’t use the 400 million in 2012 and so we're starting our 2013, it was kind of $100 million authorization. Clearly it’s going to come to the extent we get anymore near that high from the advisory business, there's not that much left in terms of things will be probably liquidating near term. But we'll see how the advisory business evolves. I won’t be at all surprised if we end up with a very substantial share buyback number for 2013. But exactly where it ends up, you're absolutely right; it’s going to depend on how the advisory revenue turns out.

Douglas Sipkin - Susquehanna

Great. And then just a little bit more on the compensation, obviously you guys continue to get the job done with a much lower ratio, all (inaudible) being equal. I mean - I guess that's sort of just 292 level for advisory revenues and is it safe to say for it to drop further you would need to see the revenues a bit higher or is there still more room here given sort of the challenging environment that competitors to sort of stay in (inaudible) with that number?

Scott Bok

I wouldn’t hold on much hope we can bring it down further at the same revenue number. I mean we've had a pretty much the same revenue number two years in a row when we've had the same compensation ratio. If we ended up with the same revenue number again in 2013, I suspect we probably have a similar comp ratio again. Obviously we're hopeful for better than that and as things do get better I think that’s the real opportunity to bring it down to where we wanted to be.

Okay, I think that’s the final question, so thank you all for your time and we'll speak to you again in a few months if not sooner.

Operator

And we thank you sir and to the rest of management for your time. The conference is now concluded. We thank you all for attending today’s presentation. At this time you may disconnect your lines. Thank you and take care.

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