Greenhill & Co., Inc. (NYSE:GHL)
Q2 2016 Earnings Conference Call
July 26, 2016, 04:30 PM ET
Christopher Grubb - CFO
Scott Bok - CEO
Devin Ryan - JMP Securities
Ashley Serrao - Credit Suisse
Conor Fitzgerald - Goldman Sachs
Steven Chubak - Nomura Securities
Vincent Hung - Autonomous Research
Good afternoon, everyone. Apologies for the inconvenience and delay. We had a bit of technical difficulty. I would like to say good day and welcome to the Greenhill Second Quarter 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 that this event is being recorded.
I would now like to turn the conference over to Mr. Chris Grubb, Chief Financial Officer. Mr. Grubb, please go ahead.
Thank you. After our brief delay, good afternoon and thank you all for joining us today for Greenhill’s Second Quarter 2016 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 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.
Thank you, Chris. In the second quarter, we achieved revenue of $90.5 million, which is 23% higher than last year’s second quarter. For the first half, our revenue was $157 million, up 16% from last year.
Our compensation ratio came down significantly in the quarter, resulting in a more normal ratio for the year-to-date, even as the absolute level of compensation rose. Our non-compensation costs were lower in absolute terms than last year’s run-rate, as we had suggested they would be.
Together, increased revenue combined with reduced cost levels resulted in a pretax profit margin of 33% for the quarter and 23% for the year-to-date. As always with us, those figures reflect all GAAP compensation and other costs, with no pro forma exclusions.
Our effective tax rate was 34%, reflecting the regional sources of our earnings. Our earnings per share for the quarter were $0.62, and for the year to date were $0.75, reflecting increases of 104% and 36%, respectively versus last year.
And our strong cash flow allowed us to retire a portion of our term debt, pay our dividend, repurchase a modest amount of stock, and end the quarter with an increased cash balance.
I will now provide some color on the market environment, our sources of revenue, and the revenue outlook, and Chris will then speak further to costs and balance sheet matters.
In terms of the market environment, it has certainly been an interesting year, with extreme volatility and negativity in January and February, and then essentially a complete rebound, and then renewed volatility and negativity in late June around the Brexit decision, which again was fairly quickly reversed.
As of yesterday, year-to-date M&A volume, annualized full year volume, and the run rate for number of deals $500 million or greater in size are each down about a quarter relative to last year. And, of course, announced deal activity from last year didn’t turn out nearly as well as hoped, given many major deals were blocked by regulators or otherwise aborted.
But notwithstanding those environmental challenges, for our firm everything is playing out as we suggested it would on the last couple quarterly calls, and we're still on track for a year that we think will look good in absolute terms, relative to last year, and particularly in comparison to our major competitors.
We indicated in recent quarters that we expected a strong first half given the backlog we entered the year with and that has come to fruition even though completion of our largest 2015 announced transaction was further delayed beyond mid-year.
The comments we made with respect to our compensation ratio, our non-compensation costs, our tax rate, our balance sheet, and our dividend are all also consistent with what happened in the first half and what we continue to expect for the full year.
Speaking of the full year, we continue to expect a much improved revenue result versus last year, and that should lead to both a significantly larger compensation pool for our people and an improved profit margin for the firm, as well as sufficient cash flow for both our dividend and some share repurchases.
The key drivers of revenue for the year are a strong backlog of major transactions coming into the year, a continued good pace of both transaction announcements and new assignments in the U.S. M&A market, increasing restructuring advisory activity, and a continued strong performance by our capital advisory business.
In the capital advisory business, our secondary team at Greenhill Cogent had a fifth consecutive quarter of remarkably consistent and strong performance, and we continue to have high hopes for that business over the long-term.
Partially offsetting those areas of strength is the fact that the pace of new M&A activity has continued to be weaker in Europe, Australia, and elsewhere around the world than it has been in the U.S. market. Given our long history and strong presence in developed markets outside the U.S., this continues to be an area of significant potential upside for us when those markets recover.
But notwithstanding the current softness in M&A markets outside the U.S., our results continued to demonstrate the broad diversity of our revenue sources. M&A, financing, restructuring, and fund placement transactions have all been strong contributors to our revenue for the year-to-date and we expect they will be for the full year.
And by industry sector, health care, industrials, and technology media telecom have been particularly active, with many other sectors also making meaningful contributions to revenue. As has repeatedly been the case in recent years, no single transaction nor any single client will account for 10% of our revenue for the year.
Now, I’ll turn it over to Chris.
Thank you, Scott. Starting with compensation costs, our compensation expense ratio for the quarter was 49%, lower than normal as we followed through on our commitment to bring the year-to-date ratio back to a more typical level. For the year-to-date, the ratio is 56%.
For the full year, we continue to expect this ratio to be at a level slightly lower than last year, while at the same time providing for significantly increased compensation for our key people, assuming revenue for the year continues to develop as we expect.
Consistent with our historical approach, we include all GAAP compensation costs in these figures, which means that unlike many of our peers, we include all recruiting, severance, acquisition, and related personnel expenses when discussing our compensation ratio.
Moving to our non-compensation costs. Our non-comp costs were $16.5 million for the quarter, similar to the first quarter figure and again down slightly relative to last year. We said last quarter that we expected our non-compensation expenses for 2016, in absolute terms, to be similar to or slightly lower than last year and we continue to expect that outcome.
In terms of our non-comp expense ratio, obviously the relatively fixed nature of our non-comp cost structure implies that this cost ratio should come down meaningfully at higher revenue outcomes than last year.
Touching briefly on tax rate, we said last quarter that we expected our effective tax rate to be meaningfully lower in 2016 relative to last year due to our outlook for increased revenue and associated earnings outside the U.S. We continue to have that expectation and the year-to-date figure of 34% is consistent with the range we'd expressed as our expectations for the full year tax rate.
Looking at our capital management and balance sheet activity, our dividend this quarter was again $0.45 per share. During the quarter, we repurchased approximately 255,000 shares of common stock and common stock equivalents in settlement of tax liabilities upon vesting of restricted stock units. The amount and timing of additional share repurchases will depend on how actual and expected revenue develops over the remainder of the year.
As we have always said, our goal remains to repurchase all the shares issued in our acquisition of Cogent and thereby return to a flat share count relative to the time of our 2004 IPO.
We are not far from that already today. We ended the quarter with cash of $64 million and a revolver balance of $55 million, again in our usual position of having a global cash balance in excess of our revolver balance.
Now, let me turn it back to Scott.
In closing, I'll briefly touch on two issues. First, on recruiting, we have recruited four Managing Directors in the year-to-date. We are excited about the relationships and skillset that each of them bring.
We may make further additions over the remainder of the year and we already have a lot of good prospects for recruitment after the next bonus cycle in the form of individuals who are interested in continuing a dialogue on that topic.
Second, I thought we should briefly touch on Britain’s vote to exit the European Union. Given the focused nature of our business, it should not be surprising that we do not expect to be significantly affected the way firms involved in trading and investing activities might be.
There may be some legal and tax structuring or licensing changes we will need to make, and it is conceivable that the configuration of our headcount across Europe could evolve over time, but none of the potential requirements we can foresee today look like they would be cumbersome or expensive.
The largest potential impact on our firm probably relates to the impact of Brexit on transaction activity in the U.K. and Europe. As I noted earlier, deal activity in Europe has been slower in the U.S. for some [indiscernible] in the U.S. for some time, but we've continued to find a reasonable number of good opportunities to serve clients despite that environment.
The quick rebound of stock markets after the initial negative reaction to the vote, as well as continuing strong credit market conditions in Europe suggest that the impact of Brexit on transaction activity may be fairly minor and short lived.
With that let me just close by saying I'm very sorry about the difficulties that our conference call provider had today in making the call work. And I think we're still getting problems right now.
We will post on our website the full script that we just read through for anybody who wants to have a chance to read it. And why don't we now try to take questions and see if that works well.
Yes sir. We will now begin the question-and-answer session. [Operator Instructions]
And our first question will come from Devin Ryan of JMP Securities. Please go ahead.
Hey, Scott, hey, Chris. Thanks for taking the question. I guess first on the restructuring business and kind of the comments that you're still seeing kind of further improvement there. I'm just curious with the recovering energy prices, is that impacting activity in the energy complex? Or are you still seeing an improvement in activity there despite the improvement in price?
And then are you seeing in activities spill into other kind of newer sectors in the retail area, you've maybe touched on before, but just kind of think through kind of where you’re actually seen that acceleration?
I would say most -- and I'm sorry there's a bit of an echo. I hope you guys can hear it the way I can. But I would say the uptick in energy prices has certainly not stopped the restructuring opportunities. Many of these problems the companies are facing are pretty fundamental and are not going to be solved by an uptick short-term in oil prices.
As to it spreading to other sectors, yes, we do think that for weaker credits -- credit market conditions have tightened and we do expect it will spread beyond energy over time.
Okay. Great Scott. And I can hear you fine. On the kind of the Brexit impact, I appreciate that there's been kind of a continued slowdown, but maybe you think that could be short-lived, I guess what changes appetite in the U.K. if there's this kind of continued uncertainty around there?
And do you think that the U.K. could actually get back to something that's healthy or is it just more function of kind of coming off the bottom work announcements over there down 70% year-over-year so that may not last and we're not going to get back to a good level for some time?
Look, I think eventually it will get back to something very healthy. If you look back over literally decades of data, the U.K. has probably always been the second most important market in the world for M&A behind the U.S., whether it's culturally or otherwise companies there, the M&A is an important part of their strategy maybe more so than companies in Japan or some other markets might see. So, I have no doubt it will come back to health.
How quickly that happens? I wouldn’t predict. I simply was saying that I don't think Brexit per se seems to be having a huge effect in the sense that activity was already slower than in the U.S. leading up to that, and you've seen with stock market and credit markets that they recovered a lot more quickly than any of the doomsayers have predicted before the Brexit vote came out.
Got it. Okay. And then just on recruiting, you had some nice MD additions recently. Last quarter, you had mentioned expectation to add several MDs. This year, you’ve already added a few, you sounded kind of optimistic about recruiting and kind of you looking in next year.
I'm just curious, has there -- is it a change in appetite or is it just a function of the conversations that you're having or just progressing positively and it's just the right personnel? Or has there been any kind of shift in competitive landscape or certain firms or you just feel like it's maybe easier to recruit out and say so you're seeing some success?
I've commented on a few of those things. I think the desire of many investment bankers, particularly at firms that may be of some of the bigger banks, maybe European banks in particular that may be facing some challenge; I think the appetite of people in those places to think about a move is probably higher than ever.
These conversations always take a long time. There were some that were right [indiscernible] now and it won't surprise me if we add more people to the four we've already recruited this year in coming weeks and months.
There are also a lot of others where people will say I'm intrigued, I'm interested. Let's keep talking, but I'm inclined not to move at the moment. Maybe let's think about it after the year end. And sometimes that can be as simple as a banker may be working on a deal for one of his most important clients and they don't want to leave that client in the lurch while they go off into a three-month gardening leave before starting in a new firm.
So, there are lot of factors that go into when a senior banker decides he wants to move firms. And so I think the environment is good. How many Execs will we get this year or next year, I don't know, but certainly we're -- we've had and we're in a lot of different dialogues.
Got it. Okay, great. Last quick one here. Just the guidance commentary, I guess maybe the outlook for the back half of the year. It sounds consistent with last quarter, you expect kind of the year to close on a good note relative to last year, last year was a wider year.
I guess last quarter you had said that you felt like consensus revenue expectations were too low, I think we're in a similar ballpark right now for consensus expectations as we were when you made that comment. I'm just curious, is that still kind of the right way to think about how you guys are looking at the rest of the year.
I don't think anything has changed from what I said before. First of all, it's hard for me to understand you because we're still having troubles with this call, but I think I picked up the gist of what you said.
Now, we're still expecting kind of everything I talked about last time. I said what I said about revenue expectations last quarter, they moved up a little bit, but certainly not very much. And yes, we still are feeling quite good about the second half of the year and nothing has changed in that regard.
Got it. Okay, great. Thanks a lot, Scott. Thanks, Chris.
Sure. Thank you.
And our next question comes from Ashley Serrao of Credit Suisse. Please go ahead.
Good afternoon, Scott.
Hey, Ashley. How are you?
I'm okay. So, maybe a couple of questions. First just based on the firm's current dialogues, I was just curious what's your outlook or large cap M&A over the balance of this year and when you think we may see a broader revival?
And then just stepping back more broadly for the industry, what impact, if any, do you expect U.S. elections to have on M&A?
On the first question, I think I want to harken back to some of the points I made I think last year over the course of the various quarters that the megadeal, the $20 billion [ph], $50 billion [ph], $75 billion transactions are very, very hard to predict how many of those there will be, and I don't think frankly that's all that indicative of the health of the market or the revenue opportunity for us anyway.
When I think of transactions that I would put in sort of the large category, anything that's much north of $1 billion represents a very attractive opportunity for us. It's often for a company that's a $10 billion or $20 billion company doing a $1 billion, or $2 billion, or $3 billion deal. Very often at that size you can be the sole advisor or certainly not more than one in two.
You also have a much better chance of getting regulatory approval. Almost by definition for deals of that size and therefore you avoid some of the significant challenges that many of last year's megadeals ultimately face.
So, for that kind of deal, for sort of $1 billion, $2 billion, $3 billion, $4 billion deal, I still think there's a lot of interest in those, obviously, morbid is in the U.S. than elsewhere. A fair amount of it the non-U.S. tends to be Transatlantic in one direction or another. So, I still feel quite good about the dialogues we're having for those kinds of transactions.
Impact of the election I think is a bit of a wildcard. I think prognosticators tend to read more sort of extreme reactions into things than ultimately ensue. If you think back to many things that have happened in recent years, and Brexit is only the latest of those where people thought well if this happens, it's going to really be terrible and in a lot of different ways. And certainly I think everyone has been surprised by how quickly markets bounced back.
I mean obviously the British currency is down still a fair amount, but equity markets, credit markets, et cetera, calmed down pretty quickly. And so I think probably life will go on in America regardless of who ends up winning in November and Greenhill will be there to help its clients respond to whatever is appropriate to do after that.
Thanks for the color there. And then maybe just another stab at the revenue question. Just wanted to focus in on your compensation commentary of the pool being larger this year, which makes sense commiserate with revenue outlook, but the ratio seeing a -- comp ratio seeing a slight reduction.
We have -- there are multiple -- if you were to look back and sort of look at the years where -- 2012, 2013, 2014 where the comp ratio ended up being slightly lower than 2015, is that a good place to start for revenues?
I wouldn't want to back you into our revenue figure. I mean I think -- obviously I said -- what I said about revenue, we had what I think is a very solid first half. We feel good about the second half. We certainly have made lots of implicit statements in the script that we think revenue is headed in the right direction, unlike frankly some of the big bank's advisory revenue.
And that's clearly just going to lead to both more compensation for our people, which is important, but also probably a slightly lower comp ratio for the benefit of our shareholders than the one we had last year. So, we'll leave it at that in terms of revenue predictions.
Okay. And just finally -- just more of a technical question. You mentioned the potential for some licensed changes post-Brexit that when all said and done shouldn’t really be expensive. But just curious, what exactly would that involve for a firm like Greenhill given that you have multiple offices in the region. What would you have to do?
Its relatively -- I mean I think from the point of view of the CEO, myself or point of our shareholders, I think its small and technical stuff. But I'm sure you've read about the so-called passporting rules in Europe where if you -- simplistically, if you have a sort of a full license to do what we do in one EU country, you're free to work across all the EU countries.
Like most firms, I think we tend to have that passport operate out of the U.K. I think hopes for everybody in the U.K. is that that will continue to be the case. I saw Boris Johnson made the comment the other day that he thought that would continue to be the case.
But if it doesn't, you'd simply shift your sort of main license to a place like Frankfurt. We've been in Frankfort for 16 years already. We have several partners there. And so it's pretty small and technical changes, which is why I said it's really not -- I don't think anything for shareholders to worry about in our case.
Okay, great. Thanks for taking my questions.
And our next question comes from Conor Fitzgerald of Goldman Sachs. Please go ahead.
Thanks for taking my questions. I guess -- and sorry if you touched on this earlier. But the pound has obviously weakened a lot since Brexit. I was just wondering if you'd seen any increased conversations from foreign buyers may be looking to buy into the U.K. just given some of the relative currency moves.
I mean certainly it's a factor we're pointing out to clients. But I wouldn't want to drop from just a month any strong conclusions by that. I mean I -- what my observation just on currency moves overall and over the long course of my career is that they don't have a huge impact. I think you could certainly see -- and maybe one deal out of Japan you did see is somebody trying to take advantage of a falling currency.
But I think equally I think what's happened in Europe may well lead more European -- U.K. and European companies to feel like they would like to have more business in the U.S. and therefore despite the fact that our currency is now more expensive for them, they may look to do acquisitions here.
So, I think, again, currency doesn't have a big impact. It kind of changes the pricing on various specific deals. But I don't think it will fundamentally shift the way M&A is working.
Got it. And then obviously you bought back some stock in the quarter. You've got the debt payment kind of coming up at the end of October. Could you just talk about your plans to use cash going forward? And are you going ranking your priorities at this point?
I kind of like the way we put it at the beginning of the script, which is it's kind of nice to check all of the boxes and retire some of the debt and pay the dividend and buyback a bit of stock and still have a strong balance sheet in terms of cash balance and I think we're going to continue to strike a balance among those. We certainly don't have much by way of way scheduled debt repayments in the near-term. So, we'll continue to balance among those four things.
That's helpful. Thanks.
And our next question comes from Steven Chubak of Nomura. Please go ahead. Mr. Chubak, your line is open.
Sorry, can you hear me now?
Yes, we can.
All right, perfect. Sorry about that. So, I was hoping you guys could provide some perspective on how the non-traditional M&A businesses have been trajecting over the last couple of quarters. And maybe more specifically just give us some insight into how the revenue composition has evolved over the past couple of quarters?
It seems as though the public proxies had understated the revenues that you have generated this quarter. I know that tends to be a recurring problem, but feels like it might also be a function of mix and was hoping you can give some perspective there?
I think we've always struggled with trying to figure out how some of the data providers project our revenues. Sometimes they seem to be somewhat close and very often they seem to be very far off. I wouldn’t look at our business as having had a huge change in mix.
As I said, restructuring had a number of recent years where credit markets were so strong there was very little of that. And that is picking up; it's not the kind of thing that sort of explodes overnight because restructurings tend to have a long time table where you just collect sort of retainers along the way and you get your success quite a ways down the road.
On the capital advisory side, I don't think there's been any meaningful change there. That business has been quite steady for us over the last several quarters, certainly for the five since we acquired Cogent. There may be some change in terms of mix of how many deals are ones where data providers can look at a public proxy or something and figure out what we did, but there's nothing we can see on the inside that would suggest why predicting our revenue would be either harder or easier than it has been in the past.
Got it. Helpful. Thanks for that. And just one follow-up from me. Maybe it's for Chris on the expense side. If I look at the operating expense, excluding interest payments, it looks like it's been tracking about down 7% first half of this year versus first half last year. And I was hoping you could give some perspective as to -- is reflected down guidance just an effort to be conservative or what's driving what appears to be a pretty healthy uptick in the back half of this year?
I think there are some moving pieces in the guidance that we gave. We've certainly done a good job eliminating some redundant costs we've had with the Cogent acquisition last year. We obviously didn’t have the professional piece we had last year. There's FX impacts the floats through.
And offsetting that, we have the accretion of the earn-out as Cogent performs against the earn-out criteria that flows through non-comp. So, we try to lay out in the press release. I'd say there's pluses and minuses. But we think taking all of that into account; we still come out slightly down relative to last year.
Got it. Thank you.
That's also not the kind of thing we're going to sort of will update guidance on a quarterly either. Yes, we're down a couple million in non-comp expenses the first half and we're not really implying anything about the second half. We're just not being more specific about that as Chris said; it's kind of still the same guidance we gave a month ago.
All right. Got it. Thanks for taking my questions.
All right. Thank you.
Our next question comes from Vincent Hung of Autonomous. Please go ahead.
Hi. How is it going?
Very well. Thanks.
So, Brexit question again, do get the sense that many companies are delaying M&A decisions until there's further clarity on single market access and the exercise of Article 50?
Look I think it's only been a month so I wouldn’t -- and we only talked to a limited member of companies about U.K. transactions at any one given time. So, I wouldn’t put too much stock in what I have to say.
But I don't think things have fundamentally changed. I think if somebody was about to start an auction of a business in U.K., it wouldn't surprise me if they decided to pause over the last few weeks just to see how markets may be -- particularly credit markets settle out.
But I, on the other hand, would be quite surprised that people said I'm going to wait to see how the entire negotiation, which could take two plus years to sort out before making whatever strategic move they have in mind.
And you've seen one huge acquisition over there already out of Japan. That acquisition certainly looked from the public statements like it was welcomed by the government. So, I think somebody pausing on a deal at the end of June, beginning of July to see how things sort out would make a lot of sense to me. Somebody is saying I'm going to wait for two plus years to see how it plays out probably is not going to happen.
Okay. Just a last one from me. Well philosophical, would you ever consider going private?
Look being public has worked for us well over 12 years. It's been a -- I would say even a strategic asset at various times to have the currency we use. We've done a couple of acquisitions with our stock. We have to pay our people with our stock. Our people as their stock best can have liquidity. So, I think being public has worked quite well for us.
Okay. Thanks a lot.
Okay. And thank you. That's the last question. I just want apologize one more time. We really had, for the first time in 12 years, quite a lot of problems with the conference number and I know it was distorted to some extent from our end also. Hopefully, it was clear on yours, but we will post the transcript -- or at least the script of our remarks at the beginning on our website for those who may be weren't able to hear them properly.
Thanks very much and speak to all in three months.
And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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