Greenhill & Co (NYSE:GHL) Q2 2021 Earnings Conference Call August 3, 2021 4:30 PM ET
Patrick Suehnholz - MD, Director, IR & COO, Investment Banking
Scott Bok - Chairman & CEO
Conference Call Participants
Brian Mckenna - JMP Securities
Michael Brown - KBW
James Yaro - Goldman Sachs Group
Good day, and welcome to the Greenhill Second Quarter 2021 Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Patrick Suehnholz. Please go ahead.
Thank you. Good afternoon, and thank you all for joining us today for Greenhill's Second Quarter 2021 Financial Results Conference Call. I am Patrick Suehnholz, Greenhill's Head of Investor Relations and joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.
Today's call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions. The firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements. For 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, Patrick. We reported second quarter revenue of $43.2 million and a loss per share of $0.45. For the year-to-date, we had revenue of $112.2 million and a loss per share of $0.34. Revenue for the year-to-date was 2% lower than our figure from last year when we had a slow first half that was followed by a strong second half.
Industry data makes clear that global M&A activity has been very strong for the year-to-date. We see that in what has been a significant increase versus last year and the year before in the number of new assignments we are winning. We also see the results of a more active market and the number of deal announcements we are associated with, as shown on the transaction list we regularly update on our website. This past quarter, we announced the second highest number of transactions in any quarter in our history. And on a trailing 4 quarters basis, our number of transaction announcements is at the highest level ever by a meaningful margin.
Many of those transactions have been for major companies, but for the year-to-date, the sizes of deals that have completed have skewed towards the smaller end of the scale, resulting in soft year-to-date revenue. In the second half, we expect the size of completed deals and related fee events to significantly increase, such so we should get to a full year revenue outcome that shows improvement over what was a respectable year for our firm in 2020. We saw the first versus second half play out similarly to the way I'm describing both last year and the year before.
On a regional basis, for the full year, we expect to show a stronger year than last year in the U.S. and Canada and a much stronger year in Australia, offset by reduced revenue in Europe, where we had a particularly strong revenue year last year. By type of advice, M&A is where we are seeing the greatest opportunity. Restructuring activity is materially lower given the strength in credit markets, but we are making progress in our strategic initiative to be more active in financing advisory assignments of various kinds. In the Private Capital Advisory area, we continue to be busy with secondary transactions in Europe and Asia, including an increasing number of complex fund restructuring transactions led by fund general partners.
In addition, over the course of the year-to-date, we've succeeded in building out a global primary fundraising team, and we expect to start seeing revenue from that group already in the current quarter. In all our businesses, we are making progress on our strategic initiative to do more business with financial sponsors. With respect to recruiting, our press release notes another recent hire on the M&A side of the business in addition to 2 more recruits in the Private Capital Advisory area. We have other recruits in progress. We already see this year as an important one in terms of recruiting, and we should see more success in that regard in the second half.
Now turning to costs. Our compensation costs were lower than last year in absolute terms, given our objective to bring quarterly compensation more in line with quarterly revenue, but our compensation ratio was still higher than our target range. Our objective is to bring the ratio down to our target range for the full year while still paying our team increased compensation in absolute dollars. Where we end up in terms of compensation cost and expense ratio for the year depends as always on our revenue outcome for the year. Our non-compensation costs were materially lower than last year and are running at a rate slightly better than our target.
Our interest rate expense continues -- interest expense, rather, continues to trend lower, given declining debt levels and continued low short-term interest rates. We continue to estimate our annual tax rate will be in the mid-20% range after adjusting for the impact of charges relating to the vesting of restricted stock, which is consistent with our prior guidance. We ended the quarter with $92.5 million of cash and $306.9 million of debt, and we paid down another $15 million of that debt after quarter end. We also declared our usual $0.05 quarterly dividend.
And lastly, as of quarter end, we have bought back 1.5 million shares and share equivalents for a total cost of $23.8 million and had an additional $26.2 million of repurchase authority available for the year ahead through next January. As I said last quarter, our principal focus is on deleveraging, but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders. Our employees currently own about half of the economics of the firm through stock and restricted stock and are thus fully aligned in trying to drive shareholder value in the quarters and years to come.
To sum up, we recognized that our first half is an outlier relative to peers in what is a strong M&A market. At our smaller scale, the random timing of deal completion has a large impact and can result in a weak quarter or even multiple quarters. Last year, we saw that same phenomenon yet with the help of a record quarter, year end, got to a very respectable full year result. This year, we have the benefit of what is a significantly higher pace of new assignments and of deal announcements.
Looking beyond this year, the same smaller scale that today results in greater quarterly volatility is what creates future upside potential for our shareholders. First, the strategic moves we are making should reduce for future quarterly volatility as well as increase annual revenue. The effort to develop a financing advisory business and to devote more resources to serving financial sponsors should be particularly important in diversifying and growing our revenue base. Second, the successful rebuilding and expansion of our Private Capital Advisory business should also add to revenue diversity and scale starting later this year. And lastly, with our lower cost, declining debt and interest expense and much reduced share count, the benefits of increased revenue would be magnified in terms of net income and shareholder value creation.
With that, I will take any questions.
Our first question comes from Devin Ryan with JMP Securities.
This is Brian McKenna for Devin. So you talked about a material increase in new client assignments and that number of deal announcements is at an all-time high over the past year. So could you just give us any additional color on this like the absolute number of new deals and how that compares to, say, last year or what specific teams and regions are driving all this activity?
I mean, the deals listed on the website, I think they were 77 for the last 4 quarters, and that doesn't include our Private Capital Advisory business, which obviously, those deals are pretty much all private, so we don't tend to list those. But I mean, that gives you some sense, I don't think we've been above 70 before. So that's a pretty significant increase, and we think that trend is going to continue just based on announcements quarter-to-date and things we've seen start to move into the near-term pipeline for the next couple of months. As to where that's happening, as I said, we've been very busy in Australia.
Frankly, it's all the areas that were very quiet last year seemed to be very busy this year. Australia, certain sectors like industrials that -- Canada that did okay last year, but all those are doing much, much better this year. Obviously, there's less restructuring but bottom line is it's fairly broad-based between all the regions we work in and pretty much focused on M&A. We've had some notable successes in financing advisory as well but no real trend other than just, frankly, more activity all across the firm.
Got it. And then you also cited full year results should be another respectable period for the firm just kind of based on the pipeline, which implies a significant ramp in second half revenues. But how should we think about that as it relates to this third and fourth quarter? Is it likely to be more evenly split between the 2 quarters or more weighted to 1 or the other?
Look, last year, it ended up for random reasons, really very heavily concentrated in the fourth quarter. I think, this year will be much more evenly split between the 2, if I had to guess. Obviously, we can never predict exactly what's going to happen in the quarter, but I think, last year was a pretty unique event where 1 quarter was so important to the whole year for us.
Our next question comes from Michael Brown with KBW.
So Scott, I was looking at the MD headcount, looks like it has 71. Last year, it was at 76 in the second quarter and I heard you correcting, kind of read in the press release, looks like there's been 10 additions year-to-date. So could you just give us a little color as to what's the delta there? Is it -- I don't know, retirements or moving to maybe senior advisor roles or just kind of net loss in headcount there? And just trying to help and kind of parse through those MD changes year-over-year.
I think, the biggest factor there is toward the end of last year, as you'll remember, we had several members of our Private Capital Advisory team leave. It was the team pretty much all in the U.S. and Europe and Asia were pretty much unaffected. It was a very top-heavy group in terms of numbers of MDs versus supporting cast. So we've rebuilt a tremendous amount of that group and really have a much broader business than we did a year ago, because now we can do primary as well as secondary, and we're certainly doing more with fund general partners as well but it won't be as top-heavy a group in terms of MDs.
So we've had some increase in MD headcount over year-to-date versus a year ago, but for that one group that left. But I think it will be -- we'll add some more before the year is over, and I'd still think it will be already the little bit of a net positive year for us, and I think it will be significantly net positive. I mean, we've had a few other departures here and there, but I mean, nothing in the slightest bit material, just kind of normal around the edges people who just didn't have tremendous success with us and thought they might have more success elsewhere. So I think, all very healthy, but for the one group that we really did have to rebuild, which we are pretty much done.
Okay. I guess and then as a follow up, there have been a lot of significant changes, I think, you touched on a big one there. But as you've done a lot of hiring over the last couple of years and there's been changes as far as individuals that have joined and left, how would you characterize Greenhill's key strength today? Obviously, again, that's evolved over time, so I'm just curious how you would characterize that and where do you kind of see Greenhill growing and evolving over the next couple of years?
I think, every region and sector is, of course, different in terms of its development. But if you said, what are some of our strengths today, I would say we have a great team in Australia. I'd say, we have a great team in Canada. I would say, we have a very long history of working for FTSE 100 type quality companies in the U.K. market, particularly a lot of public transactions. I'd say, in kind of the industry sector space, we have, by far, our largest team in industrials and I think, we have most of the various subsectors, the many subsectors in that space filled, and we do that from Stockholm to Australia to Chicago to Frankfurt and all the places where industrial companies tend to live. There are other areas where we've had a lot of consumer.
I actually would - I'd add consumer also as an area that's very, very important for us year in, year out in both the U.S. and Europe. And then there are some areas where, look, we've had some really notable successes, but we have a lot of potential to get much bigger, and those would be things like health care, technology, media, where we've had some terrific successes, but still have a relatively small team and could stand to add quite a lot more talent.
[Operator Instructions]. Our next question is from James Yaro with Goldman Sachs.
I'll just start with a follow-up on your comments around the second half being much stronger than the first. Is part of this due to some of the deals that you might have originally thought would close in the second quarter slipping into the second half or perhaps there are fewer pull forwards than you would have anticipated or is there something else at play in -- with that dynamic?
We certainly don't control, of course, the timing of transactions. If you had -- privately, we don't forecast these things, but if you privately asked me at the beginning of the year or even 3 months ago, I would have thought things would be a little more kind of smoothly spread across years -- quarters 2, 3 and 4 and it just evolved a little bit. It did the same thing last year. Last year, it evolves into really 1 very, very big quarter that offset 3 fairly soft ones and got it to a net good result. And this year, as I was saying a minute ago, I think, it will be kind of more smoothly spread across the second half versus the first, and again, get us to a pretty good place by the end of the year.
Okay. And then, perhaps on the outlook for Europe, which obviously has historically been one of the stronger areas for you. Has the weakness in Europe been driven by the new COVID variance or is there something else going on there? And is that something that we could expect could weigh on U.S. M&A going forward?
I frankly kind of look at it a little bit in the opposite way. I would say, if you think about places where business sort of got back to something a little more like normal, I would have said Australia was first, and I realized they have occasional sort of regional shutdowns and -- but still, there were people having face-to-face meeting with clients there a month ago already. And that market, from our perspective, seems to be booming in terms of opportunity. I think, the U.S., which clearly, despite the Delta variant, there's an awful lot of positive business activity in this country, and that market seems very active.
Now Europe, I think, has been a little bit behind. I mean, they were a little behind the U.S. in terms of vaccination rate and if you look at just -- when we had really robust positive GDP, they still had some negative GDP quarter. So I think, as Europe comes out of COVID more thoroughly, which I'm -- I don't doubt they will. Their vaccination rate, I think has actually even surpassed ours at this point. I suspect that the economic rebound and the transactional rebound will be very similar to what we're seeing already in Australia and the U.S.
Okay. It makes a lot of sense. And then, one last one. So you did see record low non-comp expenses this quarter. Is there any further leverage from here or do you expect economies reopening and leading to more travel for your bankers to put upward pressure on the non-comp from here?
I think, the real leverage for us is that non-comp is largely kind of a fixed figure. I mean yes, travel will pick up some. It already did pick up a little bit. It will pick up some more for sure, but I think, the real opportunity for us in terms of operating leverage there is that non-comp is pretty sticky. It will move up a little bit but as revenue goes up, non-comp won't go up much at all and should lead to stronger profit margins.
Okay. Thank you. And I think that's our last question, so we thank everybody for joining, and we look forward to speaking again next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.