Greenhill & Co, Inc. (NYSE:GHL) Q3 2021 Earnings Conference Call November 3, 2021 4:30 PM ET
Patrick Suehnholz - MD, Director, IR & COO, Investment Banking
Scott Bok - Chairman & CEO
Conference Call Participants
Devin Ryan - JMP Securities
Michael Brown - KBW
James Yaro - Goldman Sachs Group
Good day, and welcome to the Greenhill Third Quarter 2021 Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Patrick Suehnholz. Please go ahead, sir.
Thank you. Good afternoon, and thank you all for joining us today for Greenhill's third quarter 2021 financial results conference call. I am Patrick Suehnholz, Greenhill's Head of Investor Relations.
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 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, Patrick. We reported third quarter revenue of $88.6 million and earnings per share of $0.85. For the year-to-date, we had revenue of $200.8 million and earnings per share of $0.55. Revenue for the year-to-date is up 17% from the same period last year. Industry data makes clear that we continue to be in a very strong M&A market globally. For our firm, that is evident in the significant increase in new client assignments we have won this year relative to last year and the year before. It is also evident in the fact that on a trailing 4 quarters basis, the number of deal announcements, with which we are associated, is at an all-time high. While many of those transactions were for large companies, for the year-to-date, the sizes of deals we have completed have skewed towards the smaller end of the normal spectrum, resulting in a year-to-date revenue increase smaller than that of our peers. Nonetheless, we are pleased with the progress we made in the third quarter, continue to expect a strong finish to the year and are confident that our revenue going forward will benefit from a reversion to the norm in terms of deal sizes and commensurate fees.
On a regional basis, for the year, we expect to show a stronger year than last year in the U.S. and Canada and a much stronger year in Australia, offset by reduced revenue in Europe, where we had a particularly strong revenue year last year. By type of advice, M&A continues to be the area in which we see the most opportunity. Restructuring remains relatively slow given the strength of credit markets, but we are pleased with the progress of our new initiative to win more financing advisory assignments. In the private capital advisory area, we've made great progress in building out our global team for both primary fundraising and secondary sale transactions, and both of those businesses now have strong assignment backlogs. Across all our businesses, we are pleased with the progress in our new initiative to do more business with financial sponsors. With respect to recruiting, our press release notes 2 more senior hires in M&A, one each in Germany and Australia. We are pleased with what we have accomplished in recruiting this year and remain focused on adding more senior talent in the months to come.
Now turning to costs. Our compensation costs have been lower than last year in absolute terms given our objective to bring quarterly compensation more in line with quarterly revenue. Our compensation ratio of 50% for the quarter brought down the year-to-date ratio to 65%, and our objective is to bring that ratio down further by year-end, while still paying our team increased compensation in absolute dollars. Where we end up in terms of compensation costs and expense ratio for the year depends as always on our revenue outcome for the year. Our non-compensation costs were materially lower than last year and are running at the low end of our target range for the year-to-date. Our interest expense continues to trend lower given a declining debt level and continued short -- lower short-term interest rates. We continue to expect our annual tax rate to be in the mid-20% range before adjusting for charges relating to changes in the value of restricted stock upon vesting. We ended the quarter with $100.4 million in cash and $291.9 million of debt. And after the quarter end, we made an additional voluntary debt repayment of $10 million. During the quarter, we repurchased more than 637,000 shares and share equivalents for a total cost of $9.5 million. And in October, we repurchased an additional 194,000 shares for a cost of $3.1 million.
For the year-to-date, we've used our cash flow to repay $45 million of debt and repurchased $36.4 million of shares and share equivalents. In addition, we declared our usual quarterly dividend of $0.05 per share. As I said last quarter, our principal focus is on deleveraging, but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders. Our employees currently own about half of the economics of our firm through stock and restricted stock and thus, are fully aligned in trying to drive shareholder value creation in the quarters and years to come.
To sum up, we are pleased with our revenue growth and profitability this quarter, and we are also pleased with our progress on our strategic initiatives. Our goal is to both increase our total revenue and to reduce our quarterly revenue volatility, and we aim to do that by expanding our client base to serve more financial sponsors and expanding our service offering to include more financing roles and more private capital advisory transactions. If we succeed, our reduced cost, declining debt and interest expense and much reduced share count should together result in significantly greater earnings and shareholder value creation.
And with that, I'll be pleased to take any questions.
[Operator Instructions]. And the first question will come from Devin Ryan with JMP Securities.
First question here, just want to make sure I heard correctly. I think you said, you expect to pay more in absolute compensation, but a lower comp ratio. So I guess that would imply an expectation for revenue growth on the year unless I misheard something in that comment. I just wanted to make sure that I kind of heard that correctly.
I think that's the way the math works. Our goal is definitely to pay a higher absolute compensation, and we do aim to bring the comp ratio down further from where it had at the end of the third quarter.
Yes. Okay. Got it. I could do the math, too. I just want to make sure I correctly do so. Okay. Great. Appreciate that. And then in terms of kind of the financial sponsor initiatives, Scott, can you maybe talk a little bit more about what you guys are doing there? Obviously, we see kind of this opportunity that's only grown in the market and sponsors are playing a bigger and bigger role. And particularly, as you guys have kind of a global business entering Europe and even parts of Asia, sponsors are clearly kind of moving more global as well. So can you just talk a little bit about kind of how you guys feel like you're positioned and some of the things you're doing to, I guess, do more business with sponsors over time?
Sure. I mean this -- I can't overstate how important this initiative is because sponsors just become an enormous part of the M&A market. And by the way, also, they hand out a lot of restructuring assignments. They do a lot of refinancing. They obviously raise new funds. So there are many, many ways in which we can serve them. And I think if you go back to the history of our firm, we started when there were very few firms like ours and the competition was really all the big banks. And the big banks love the financial sponsors, right? They really put a huge amount of effort into serving the KKR, the Blackstone, the Apollos, et cetera. What's happened over time is, number one, the number of sponsors is just exploded, right? There's 25. Well, everybody knows the name, and there's several hundred more where they have different specialties and different sizes and different regional focuses and so on, but there's just hundreds of these things. And they're very, very active, playing a very large role -- increasing role in the M&A market. And so we realized that we had focused too much kind of almost exclusively on public companies and frankly, even to serve those public companies.
For example, when they want to sell an asset to this financial sponsor world or want to acquire one from that world, we needed to have better relationships there. And so the first thing we discovered is that we already across the firm had a lot of good relationships in the space. An individual doing health care services, somebody else doing packaging, they had a set of dialogues. What we did not do was coordinate well across all those people to make sure that, that financial sponsor knows all the things we're doing for them, all the opportunities we're bringing, all the ideas we're bringing, all the attention we're paying. And then, of course, you want to try to get paid back for that. And those sponsors are, I think, very, very good at understanding the quid pro quo and realizing that they want to have -- get a lot of service from us. They have to repay that. They're happy to do so. And so that's what we've done.
A lot of it is just organizing ourselves and then secondly, just getting all of our partners to pay more attention to that client base alongside their public company client base. And the market is so big that it's not like there's not room for another firm like ours to focus on that community, and we are really pleased with the progress we've made so far. I mean, I think even in the fourth quarter, you'll see quite a lot of announcements that will relate to that client base. So you're going to see that -- whether it's financing, whether it's M&A transactions and clearly, we're building more of private capital as well. You're going to see that we are definitely making a lot more money from financial sponsors kind of starting in the latter part of this year and certainly, it should build a lot from there.
Okay. Great. Maybe just one more, thinking about just the backlog progression and the build by region, you gave some good color on kind of your expectations on how the full year will shake out from a regional perspective, which is a little bit backward looking. But are you seeing areas like Europe start to maybe perk back up a little bit relative -- I know you had a particularly strong year last year, but any kind of difference from kind of a backlog trajectory by region than maybe how 2021 has been shaping up?
Look, I think the one outlier for us this year is that we have had less deal activity in Europe. But I think we have -- I think what's important for shareholders to remember, so we're not big enough to sort of track the market. We're never going to be sort of the index fund where the market goes up 25% and we go up 25%. So I think, yes, we had a very strong year 2020 in Europe for whatever reason, just random serendipity of which clients did deals and which auctions were own by whom, et cetera. It's been a much quieter year for us over there and pretty strong everywhere else. I have no doubt that our franchise is stronger than ever over there.
And there are a lot of interesting dialogues we have going on, and I would absolutely expect a much better year in terms of European productivity for us next year, even if the M&A market as a whole, the European market became quieter just because there's a certain amount of our success that's dependent on our client base and our efforts and there's some, of course, the benefits from just a rising market. But that's the only thing really worth highlighting. I would say, the U.S., we've had -- we're having a solid year, and I think there's plenty of room for upside next year and beyond given particularly this growing focus on financial sponsors as well as public companies. And in Australia, we're having one of our best years in a number of years, and frankly, I think next year will actually be better than just based on the backlog. So the big swing factor for '22, I think, will certainly be Europe in a positive direction.
The next question will come from Michael Brown with KBW.
So I just wanted to hear a little bit more about the quarter. Could you just give us a little bit of -- a little more insight into the key strengths there? And then your comment on the fourth quarter as it relates to the comp ratio is certainly really upbeat. So I'd also just like to hear a little bit more about what's the key drivers there. It sounds like sponsors might be -- maybe the key element that's really heating up here in the fourth quarter for you guys, but I'd love to hear a little bit more about that, too.
Sure. Absolutely. I think the answer to a little more color on the third quarter and also a little more color maybe on the fourth quarter and beyond, I think is sort of the same point, I think, can answer both, which is that -- we're -- this is a year for us that's characterized by smaller transactions. We don't have as many of sort of the blockbuster, really big, really high-profile public company deals with a really big fee attached. To me that, in some ways, makes our results more impressive because we haven't benefited from a small number of really outsized fees, but we've had a high volume of transactions. They just happen to have been toward the smaller end of the spectrum, and so there's a lot more granularity in our numbers this year.
And of course, when you have that, your data can be -- your sort of results can be less visible from the outside. So we are doing more financing advisory things and not all of them get announced. These are almost by definition not public companies. They're -- although some exceptions, certainly, but they're -- the cases where people need our financing advice to go to the very large and growing direct lending market, it's very often it's private companies. They don't always want to announce whatever they've done in their financing. So there are some things we're doing that can be fairly significant that are not appearing in the public domain, and they're not even appearing on our website in some cases.
And there are other things that are just -- again, this year, there's a kind of proliferation of smaller deals that may not get as much high-profile attention. So I think that's why maybe the third quarter is better than what people were expecting. And I think similarly, that's what makes us feel the way we do about the fourth quarter and, frankly, even beyond that, just the increased granularity of what we're doing. More products for more types of clients and in a wider size range, I think.
Yes. That's helpful to understand what's really going on underneath the surface. So Scott, one thing -- certainly, impressed with the pace of share buybacks in the quarter that was certainly above what we were expecting. And I see that your basic share count has come down nicely, but your diluted share count is actually up versus the first quarter. Can you explain some of the drivers there? I assume there's maybe something related to the treasury method that could be impacting it, but is there any other puts and takes there that we should be thinking about?
No, it's all that really. It's the fact that when you're in a loss position, you end up focusing on basic shares outstanding. And when you're in a profit position, you focus, as most companies do and we normally do, on the diluted number. So if you look at our diluted number over time, it's very consistent. Obviously, it stepped down a lot with our recapitalization a few years ago and continued share buybacks, but that explains the whole story. So I think if -- early in the year was obviously, in our view, at least a bit of an aberration in terms of the results and revenue at a level where there was a loss. And so you had kind of a bit of peculiarity in terms of the share count. But I think if people focus on diluted, they'll see that it's been consistent and declining. And we are -- look, we are quite active in share buybacks. We have deleveraged quite a lot, but we still think the stock is quite undervalued. So we've been buying back, frankly, as much as we can, which is a limited amount given the amount of liquidity in the stock and all the SEC rules about how you do that. But to the extent we can, we've been doing that, and I expect will continue.
And our last question will come from James Yaro with Goldman Sachs.
So you've historically had one of the strongest cross-border practices out there. So I'm curious how supply chain disruption is featuring in your client dialogues? And then how would you contrast the cross-border versus in-market M&A in both the U.S. and Europe?
First of all, I would say, absolutely, that has been an enormous strength of our firm. We have 5 offices each in Asia Pacific, Europe and the U.S. We have a very collegial culture and people work together extremely well across borders and cross-border deals. So that has been a strength. I think kind of for the same reason I just gave a minute ago about kind of a tendency towards smaller transactions this year than in a typical year for us. There have been fewer of the big blockbuster cross-border deals that can generate huge fees and a high profile, but there's been plenty of smaller transactions that are cross-border between all of our different geographies and offices.
And I have no doubt that the larger ones will come back, they always do. It's just kind of random as to which years they tend to fall in to some degree, but that's a very, very important part of our business. And frankly, even in the financial sponsor role, I think it is a little bit of a differentiator for us. I mean there are firms that focus almost entirely on the sponsor community, but are much stronger in one market -- off in the U.S. market and have less reach globally, and we have a lot of that. So I don't think you'll see in our numbers sort of the huge impact of the cross-border deals that you maybe have in years past, but there certainly are some really important ones there, and I think there'll be more in the fourth quarter and more as the years go on.
Okay. That makes a lot of sense. And then we've talked about, obviously, one of the macro risks to M&A in terms of supply chain disruptions. But one of the issues we've heard from peers is that there's this micro bottleneck in terms of service providers, specifically lawyers and accountants hitting capacity constraints in terms of deals, and this may be impacting the timing of deals. Is that something that you're seeing? And could you characterize the impact if you are seeing it?
Yes, I agree that supply chain disruption generally in the economy is not a big problem for us. I mean that's a bit of a high-class problem in some ways that corporations are making such great profits and that drives more deal activity. And if they're running out of certain supplies, that's probably something that gets solved over time. For us, yes, I would agree, we have seen cases where accountants seem almost too busy to take on the incremental transaction to do maybe due diligence as part of a deal or something. But it's -- I would not call it a significant factor. I mean you kind of hear about it here and there. And sometimes, there are some question or some -- maybe some minor delay or things like that, but M&A volume, obviously, has been running very high. We've had more transaction announcements in the last 12 months than we have and in the other 12 months, people are finding a way to get it done.
I mean that's one thing, I think, that is certainly true of investment bankers. I think it's equally true of lawyers that they're not going to turn away the incremental attractive project. They're going to find a way to get it done. Obviously, it can mean burning the midnight oil in some cases, and it can mean trying to work in a more efficient way and clients have to kind of speed things along more than they might in a more relaxed environment as well. But I wouldn't think it's a real constraint on our earnings capability at least at this point. And if it did get there, that would probably be a high-class problem in the sense that there'd be so much business that we'd probably all be pleased to take a bit of a breather before taking more on.
Absolutely. That makes a lot of sense. And then my last one is just if you could just sort of characterize the restructuring environment you're seeing today? Has it picked up at all off the lows? Or is it continue -- does it continue to sort of remain quite muted?
I think restructuring has remain quite muted. I think I was certainly one of the early people saying this very early this year. Already the last year, of course, it was a restructuring boom, and there were a lot of deals that carried over that got -- carry into this year and got done in most cases, probably earlier in the year, but that -- the credit markets are just so strong that there has not been a lot. There's some still, of course, but not been a lot of restructuring activity. But for the very same reason that strong credit market is driving wonderful financing opportunities across the direct lending market, and I'm sure you listened to the earnings calls for the Apollos and KKRs and Blackstones of the world, and they are putting out enormous amounts of credit. And our clients can access that credit, and we can help them do that. And so our -- the people who last year were working on bankruptcies for us, in many cases, this year are working on financings across the table from those same parties that they were working with on bankruptcies in the kind of the midst of the pandemic.
Okay. Thank you. Thanks, everybody, for joining, and we'll speak to you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.