Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Greenhill & Co Corporation (NYSE:GHL)

Q2 2012 Earnings Call

July 18, 2012 04:30 AM ET

Executives

Chris Grubb - CFO

Scott Bok - CEO

Analysts

Joel Jeffrey - KBW

Devin Ryan - Sandler O'Neill

Alex Blostein - Goldman Sachs

Howard Chen - Credit Suisse

Douglas Sipkin - Susquehanna

Michael Wong - Morningstar

Operator

Good afternoon and welcome to the Greenhill Second Quarter 2012 Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to Chris Grubb, Chief Financial Officer. Please go ahead.

Chris Grubb

Thank you. Good afternoon and thank you all for joining us today for Greenhill's second quarter 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 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'd now like to turn the call over to Scott Bok.

Scott Bok

Thank you Chris. The second quarter was obviously a slow one both for the entire transaction market and for us. We had very few significant transactions close in the period and also had fewer non-public assignments come to fruition than usual. As we have always had quarterly results will vary widely based on the timing of individual assignments and it's best to evaluate our results over longer periods. With respect to this quarter that is particular true.

Notwithstanding the soft quarter we feel good about how the year is developing for us both on absolute terms and relative to our competitors. Let me start with the data and then provide some more color.

Our advisory revenue for the quarter was down substantially compared to 2011 but on the year-to-date basis is down only 12%. Our total revenue is also down modestly on a year-to-date basis benefiting from positive movements in the value of our remaining principal investments in addition to our advisory revenue results.

For the second quarter our pre-tax profit margin was 7% and we had earnings per share of $0.07, while on the year-to-date basis we achieved a pre-tax profit margin of 22% the same as last year’s first half margin and achieved earnings per share of $0.60 which is down slightly from $0.64 last year.

You will recall that we have consistently talked about having 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 on one of our closest peers. Three, to maintain the strong dividend policy and four, to maintain a flat or even a 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 year-to-date 12% decline in advisory revenue far outpace the markets statistics for global M&A activity as well as substantially exceeded the year-to-date results announced so far by the large banks with which we compete.

Globally, the volume of completed M&A transactions for the first half was down 30% versus the prior year. Five of our nine large global bank competitors have reported second quarter results so far and their aggregate year-to-date advisory revenue was down 19% versus ours down 12%.

You will recall that the 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 39% over the preceding 3 years while the aggregate advisory revenue of the big bank group actually fell 17%. We are pleased that this trend towards significantly increased market share remains very much in place in the first two quarters of 2012.

In terms of how we want to build our firm we are focused on breadth of industry coverage, geographic diversity and offering many types of advice outside of traditional M&A including financing and restructuring advisory as well as capital advisory or fund placement.

It is the breadth of our revenue sources that has allowed us to continue gaining market share during this challenging transaction environment. In terms of geographic diversity in year-to-date we have seen significant improvement in our revenue from European clients despite the continuing economic and market challenges there that you all are familiar with. This is probably offset to reduced level of revenue in Australia which comes after a very strong couple of years in that market.

By industry we also showed good breadth, as listed in our press release we completed six transactions in the second quarter across a range of industries and this industry breadth combined with what we showed in the first quarter also reflects the range of industries that are active in our pipeline of ongoing advisory assignments.

Specifically, industrial, healthcare and energy all seemed quite active. Lastly in terms of assignment type we have seen an increase in the financing and restructuring advisory areas that an increased contribution from capital advisory partially offsetting lower M&A completions in year-to-date.

All the foregoing comments 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. As the old saying in the money management business goes you can’t eat relative performance so we understand that absolute performance is important even if it is highly dependent on the general market environment.

As I said at the start we actually feel quite good about how the year is developing for us. With the caveat that the likelihood and timing of specific transaction is inevitably uncertain, recent transaction announcements combined with our book of current assignments suggest that advisory revenue similar to or better than last year continues to be the most likely outcome for our firm for the full year 2012.

Whether you look at data for the entire market were announced M&A volume is down 19% year-to-date or at the advisory revenue of our largest competitors it is clear that that kind of outcome will be quite different from the likely outcome for our large bank competitors.

In other words the macro environment maybe giving us some help in recent weeks when the data has shown some pick up in overall M&A activity but the more important factor is likely are continuing market share gains. It is more clear than ever the clients have increasing concerns with the conflicting interest that are inherent in the universal bank model and are turning the firms like ours for independent advice on a variety of matters.

As a firm that is entirely focused on the client advisory business that has a strong presence in each of the largest markets for transaction activity that has deep experience in almost every industry sector and that now has 16.5 years of building a brand. We are well positioned to benefit from that continuing trend. Now I will turn it over to Chris.

Chris Grubb

I am going to cover four major topics today, compensation cost, non-compensation costs, dividends and share repurchases and finally I will provide an update on the continuing liquidation of our remaining principal investments. Let me start with compensation.

As we have commented previously our goal is to achieve a compensation ratio below 50% driven by very high productivity per employee. In the first quarter consistent with our targeted level we achieved a compensation ratio just below 50% of revenues.

In the second quarter due to a soft revenue results our quarterly compensation ratio was above our targeted level of 60% such that the year-to-date compensation ratio is now 54%. While we expect that will be the lost GAAP compensation ratio of our closest peers we are also quite focused on the absolute level and hope to drive that lower for the full year depending on revenue levels.

(Inaudible) couple of obvious questions on compensation despite the recent recruiting we have announced, we expect our head count will be up only 5% or so by year end and we still expect our fixed compensation cost for the full year to be very similar to last year’s level of around a $130 million. That should allow us to compensate our people competitively while also achieving a good outcome for shareholders this year.

Turning to our non-compensation cost, our second quarter non-comp cost were $15.4 million a significant decrease from the first quarter and a slight decrease from the second quarter of 2011. As was the case in the first quarter, we continue to incur increased travel expenses associated with an increased level of business development activities but that should be seen as a good thing.

The decrease from the first quarter was primarily driven by the lack of a number of small generally onetime items we incurred in the first quarter. There are obviously some differences each quarter and we are up slightly on a year-to-date basis compared to 2011, but consistent with our columns (ph) in the first quarter call, we do not expect the annual run rate for 2012 to be up meaningfully over 2011 levels.

On the topic of dividend and share repurchases. Our dividend this quarter is $0.45 per share consistent with the last few years. During the quarter we also repurchased our 290,000 shares and an average cost of $34.08 per share.

It's important to note in connection with our share repurchase activities that we continue to maintain a share count, is effectively flat with our 2004 IPO share count which compares very favorably to both our large and small competitors.

After our dividend and share repurchases we again ended this quarter in net cash position with cash of $41.6 million and debt of $27.8 million. Our Board of Directors has authorized to repurchase of up to $100 million of our common stock through the end of 2012 of which just over $80 million remains available.

We plan to continue our open market purchases in the second half with the amount of such repurchases dependent on our earnings as well as the results of the continuing liquidation of our investment portfolio.

Finally let me touch me on our remaining principal investments, our principal investments generate a second quarter gain of $2.2 million and a year-to-date gain of 11.6 million if that’s majority of which relates to our Iridium.

On premium calls we explained that we have entered into a 10b5-1 program for the disposition of Iridium shares over a period of approximately 2 years or longer. The program continues to be executed exactly as planned. During the second quarter we sold 1.80 million shares at an average price of $8.57 per share for total proceeds in access of $9.2 million.

As we have stated before, is our intention that the net proceeds from these sales will be returned to shareholders in the form of dividends and/or additional share repurchases. We ended the second quarter with investments valued at a 112.2 million which includes both our limited partner investments and our previously sponsored funds of $50.2 million and our remaining Iridium stake valued at approximately 62 million.

Now let me turn it back to Scott.

Scott Bok

I would like to close by talking about some very exciting personnel developments. On our first quarter earnings call we commented that we were seeing a surge in interesting recruiting opportunities. Since then we have announced 5 excellent additions to our global team of client facing managing directors which with those additions now stands at 68. Three of the (inaudible) will support a significant expansion of our European business building on our strong existing team in that region.

Luca Ferrari will join David Wyles as co-head of our European Corporate Advisory business. Mats Bremberg will join our longtime colleague Jacob Spens in opening an office in Stockholm with the goal of furthering our commitment to the Nordic region.

And Anthony Parsons will join as a Senior Member of our team focused on the UK. In the New York, Eric Mendelsohn joins as a Managing Director focused on restructuring and financing advisory opportunities and finally Gavin Solotar will join the firm in New York as a Managing Director and General Counsel. Each of these individuals bring deep experience as well as a significant number of clients and other important relationships within the Greenhill and we believe each will help us continue to grow our global franchise as a leading independent advisor to clients on their most important strategic transactions.

We are continuing to see interesting recruiting opportunities and will not be surprised to add a few more before the year is over all in the context of what will be a modest increase in total headcount as Chris mentioned. We continue to be very selective in terms of who we add as we expect the many challenges facing their large bank competitors we will be sending more senior talent our way again after next year end.

Now we are happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Joel Jeffrey of KBW.

Joel Jeffrey - KBW

Just a quick question, in terms on the investment side I mean it looks like in terms of the GCP-2 (ph) options that they are exercisable on December. Can you just give us a little color on where you sort of stand on those and any impact they could have on financials.

Chris Grubb

First of all we don’t know where we stand because this is a put and obviously the people who bought our stakes in the old private equity funds will make a decision as well as they want to put one or both of the investments that are involved. It will have some impact on cash but wouldn’t really have any impact on earnings since we marked that position to market every quarter.

Joel Jeffrey - KBW

Okay so it's purely an impact on cash.

Chris Grubb

Yes it is. Yes.

Joel Jeffrey - KBW

Okay and then just kind of sticking on the cash side, it looks like in April you reduced the size of your revolver from 50 million to sort of 45 million and you had a lower rate for it, just I mean curious given how sort of challenging environment has been, what was sort of the thinking behind bringing the revolver down in terms of size?

Chris Grubb

We were more than happy to get a lower rate in exchange for a tiny reduction of the size of the revolver. If you have seen we have maintained and that cash position was really very modest debt and frankly we just don’t see the need for that size facility going forward.

Joel Jeffrey - KBW

Okay and then I guess lastly in terms of thinking about the dividend, I mean you gained I guess you got about 9.2 million cash from the Iridium sales and you certainly had a positive cash flow from the earnings side. I mean in terms of your buy backs and your dividend I guess sort of how sustainable is this?

Chris Grubb

I think based on what we see in the business going forward we think it's completely sustainable, both the dividend and share repurchase this is at least for as far as we can see. I have made some comments about how we see the rest of the year playing out and obviously we do have close to $10 million a quarter of Iridium proceeds on top of that. So we don’t see any risk at all to the dividend and in fact as Chris said we will be continuing to buy back stock on top of that.

Operator

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

Devin Ryan - Sandler O'Neill

Just given that comment about similar to better advisory revenues for the full year, can you just given us a sense of what percentage of getting there is dependent on deal still getting announced in the coming months versus what’s already been announced and is out there in the public domain?

Scott Bok

I don’t think it's really appropriate for us to be going into more detail about how we see the rest of the year playing out. Obviously what we said and we said it was a lot of thought, you can look on our website or in the various database to collect information, see there has been kind of flurry of recent announcement involving us. So that basis for the comment we made.

Devin Ryan - Sandler O'Neill

Okay that’s fine and then on the compensation expense, high ratio than the target range this quarter but also kind of when we think about how you think about the comp ratio and I guess maybe if we think about in the four year context, given that comment that you made about again the revenues been similar definitely better than last year given the fixed cost or fixed comp is roughly the same, is there anything else that would move the needle one way or the other relative to where you guys came out last year on the comp ratio.

Scott Bok

Obviously I do think that the best way to look and think about a comp ratio is on an annual basis and I think it's fair to say that if we end up with revenue that is similar to last year we should end up with comp that’s similar to last year if we do a bit better than that, the comp ratio might be a little bit lower if we end up doing worst then obviously it could be a little bit higher and obviously you have to factor in the impact of the principal investments as well which last year was a bit negative and so far this year has been positive but those are the factors and the mix.

Operator

The next question comes from Alex Blostein of Goldman Sachs

Alex Blostein - Goldman Sachs

I wanted your thoughts kind of on your comments around the advisory revenue, so it looks like at least from the data that we can see the backlog is still pretty thin into the third quarter clearly lots of big deals but seemed like are going to close in the fourth quarter. I guess is that the right way of thinking about there is other things going on behind the scene that we are just having team yet they give confidence around your commentary on advisory revenues been flat to up this year?

Chris Grubb

Yes I would say that I mean there is clearly a lot of value and things that have been announced recently for us and but clearly there are other things as well that we are working on that we are expecting will come to fruition well before year end.

Alex Blostein - Goldman Sachs

Okay and then I think in the past you guys talked a little bit more about the compensation of the advisory business between restructuring and fund placement and the pure kind of M&A advisory, can you give us a little bit of more color on what that looks like in the second quarter or maybe year-to-date?

Chris Grubb

I mean I always think I mean a quarter is such a short period of time to think about that kind of thing, but it's I would say it's the fund placement business is kind of similar to what it was last year, it probably honestly the first half looks very similar probably to what it last year in sort of a transaction type or revenue type, by revenue type I mean retains versus completion versus announcement versus fund placement by transaction type M&A versus restructuring et cetera. It all looks quite a lot like last year, the one difference been geographic where as we said there has been quite a pickup in Europe offsetting a decline in Australia with North America about the same.

Alex Blostein - Goldman Sachs

Got it and the last one for me is on the head count and the recent hires you guys just made so, dynamics in Europe for the market broadly remain obviously pretty challenging in the activity out of Europe, for you guys just picked up I guess but for the market overall remains pretty soft. Can you maybe help us understand a little bit more I guess around the timing of the hires in Europe given the backdrop for kind of traditional M&A if there is a probably a little less robust than maybe in some other regions and then do you think it makes sense to wait I guess more before committing to hires given that investment might take a little bit longer to pay off.

Chris Grubb

I would say that in Europe those hires is really the unique quality of the people and I think almost no matter what the environment we would have brought people of that quality on board, separate from that and then obviously supporting the decision is that there is really not much request from where we are going to see. We’ve seen a material pickup in revenue from European client’s year-to-date and we have got some interesting things we are working on. So we actually I have certainly realized that probably is not true across the board for others and Europe remains a very, very difficult place but somehow we have managed to find a fair amount of things to do. We think there is more demand for independent advisors like ourselves and so we are glad to be expanding a bit over there.

Operator

The next question comes from Howard Chen of Credit Suisse.

Howard Chen - Credit Suisse

Scott, the comps (ph) appears to be the major eliminating factor in getting deals across the finish line. You know what are you hearing from COs and Boards in terms of what we need to see out of Europe, the U.S. election, the fiscal cliff to maybe progress some of these transactions that have been caught up in the backlog.

Scott Bok

I think it's hard to say I don’t hear a lot of people with respect to M&A transactions focusing of the fiscal cliff. I am sure that impacts all other many other parts of our economy and the markets but we don’t seem to think see or discuss a lot in terms of impediment to M&A, but clearly Europe quite different from that has caused a lot of volatility which is not only impact in the European markets and financing markets but very much the U.S. and elsewhere as well.

So I think any kind of clarity to how things are going to play out over there clearly would be a big position for the M&A market. I think what we are maybe seeing in recent weeks as I said clearly there have been some more announcements and clearly we benefited from that maybe it just simply in some cases that companies have important strategic priorities and they are just not going to wait around forever before they pursue them. I suspect that’s the case you know in some of the things we are working on.

Howard Chen - Credit Suisse

Great thanks and maybe just another follow-up on your most likely scenario that 2012 advisory revenues end up higher than ’11. So the simple math is back half quarters would average like 92 million a quarter to be above the back half -- to be above last year. How much do you have, how do you think of that figure is locked in and fixed given retainers and other businesses, other deals that you think are highly confident that you have a closing and a fee-in.

Scott Bok

As I said a minute ago, I really, we obviously wanted to give people. What we are seeing some interesting trends in our business that we wanted to notify our investors as part of this announcement but I don’t think it's appropriate for me to go further and try to sort of break things down individually and how it's all going to play out. Clearly that what we are seeing, we have seen a lot of recent announcements that helped give us comfort to make that statement and clearly there are others who are obviously not assuming a 100% or anything remotely close to a 100% probability on things we’re working on, done at year end believe me but that I think the statement we made is a pretty informative one and probably about as far as we can go.

Howard Chen - Credit Suisse

Okay understood, thanks for that Scott and just final one Chris I just want to clarify the fixed compensation thing that you said, Chris, did you say it's roughly a 130 million today?

Chris Grubb

Yes for the base compensation of base plus RSU amortization is 130 million.

Howard Chen - Credit Suisse

And then just if we just annualize the second quarter compensation it gets you to a 114 million, could you walk through a couple of puts and takes in terms of just reversal of prior bonus accruals versus impact of new hires and departures?

Chris Grubb

We are not going to break that down on those costs; I don’t have that in front of me there will be some additional disclosure in the queue.

Operator

The next question comes from Douglas Sipkin of Susquehanna.

Douglas Sipkin - Susquehanna

Two questions, so you touched on a bit Scott but maybe I can drill on a little bit further. It does seem like you know sort of something is kind of happen in the M&A market in the last couple of weeks maybe last month or so and then obviously specific to you guys I mean is there something else going on. You know I know we have always talked about conflicts and things like that I mean, is that like driving incremental business for you guys right now. Is it really just a culmination of stuff you have been working on for a bunch of month finally coming to fruition?

Scott Bok

I think it's more of the latter, I mean clearly over the last years we have added a number of what we think are very, very good people. It takes time especially in a difficult market for them to really to start to produce, when you see the market perhaps following a little bit in terms of transaction activity and that leading, more deals getting announced or closer to announcement and there is as you can imagine anything you see announced is something that’s been worked on for a very long time before it ever sees the light of day publically.

So it's not like it's a big shock here to us, we know we have been very, very busy on very high quality projects and we are just kind of suddenly in recent weeks seeing more than finally come to public fruition.

Douglas Sipkin - Susquehanna

Got you okay and maybe a follow-up more on the balance sheet stuff. I mean on average, I mean what is sort of the difference between I guess the cash earnings and the GAAP earnings, the reason why I mentioned because it seems that you guys do get drilled a little bit on the dividend but all quarters where the payout ratio is above 100% on a GAAP basis, I am just trying to figure out you know on a cash basis you guys I should say you guys never have flinched with the dividends. I am assuming that the cash earnings are decent amount of hire, can you provide us maybe with what the delta is between on average between cash and GAAP?

Scott Bok

I think because there is no one year (ph) of fairly volatile revenue business. I mean I think if you look in our disclosure around RSU amortization obviously that is all non-cash and so you can look at our net income, obviously we are not a business with a lot of capital expenditures or something. So it's pretty much kind of net income plus RSU amortization is what the cash earnings are of the business.

So that’s why we don’t, you are right, we don’t feel frankly for the foreseeable future slightest concern about the dividend given the earnings level what we see developing in revenue, the non-cash portion of our cost structure and then of course the liquidation of our investments.

Douglas Sipkin - Susquehanna

And then just final question, when do your blackout periods end for first stock buybacks I mean obviously you know imagine up until earnings you couldn’t do anything I mean you have to wait till the end of the month or end of you know couple of days after earnings, just curious.

Scott Bok

I think we probably don’t want to disclose that. I think different firms have different policies, you can be sure that we have an appropriate and conservative one but I wouldn’t want to say more than that.

Operator

The next question comes from Michael Wong of Morningstar.

Michael Wong - Morningstar

Just one question from me about the deterioration of Australia and improvement in Europe, was it that Australia was just so abnormally high recently and it's fallen to either a decent rate or below normal rate and for Europe was it just that the comparable prior period was abnormally low and it's just a significant increase from abnormally low number to I guess somewhat normal if not subdued number so just kind of the revenue in Australia and Europe versus what do you might think is normal.

Scott Bok

It's a good question and it will be a good one to ask again at the end of the year when we have a little bit more data. I would say with respect to Europe it obviously the activity is way below what we saw literally for a 10 year period from 1998 to 2007. So yes it is rebounding off a very low level that we have talked about for the last few years, it's not like we are making a stunning amount of revenue over there but it's up quite materially from what had been in the top few years. We are obviously we are pleased that that’s getting back toward not to but toward the historic level of productivity over there.

In Australia I would say after two quarters, I would just say I think it may well be nothing more than random, I mean clearly there is softness in commodity markets, clearly there is a slowdown somewhat of a slowdown in China maybe that’s impacting to some degree transaction activity in Australia but we feel like we have a lot of great assignments and is a big market share of activity as we ever had there and obviously over a couple of quarters you can just sort of randomly have left deals get announced and closed and at this point that’s certainly what we are hoping it is and could well be the case.

Scott Bok

Okay I think that’s last of our questions. So, thank you all for you time and we look forward to speaking to you again next quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Greenhill & Co Corporation CEO Discusses Q2 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts