Q2 2020 Earnings Call
Thank you operator Hello, everyone.
Hi, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today October 24 2019.
By now everyone should have access to our second quarter fiscal 2020 earnings release, which can be found on the houlihan Lokey website at www Dot HL dotcom in the Investor Relations section.
Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward looking statements.
These forward looking statements, which are usually identified by use words, such as well expect anticipate should or other similar phrases are not guarantees of future performance.
These statements are subject to known numerous risks and uncertainties that could cause actual results to differ materially from what we expect and therefore, you should exercise caution when interpreting and relying on them.
We refer all of you to our recent FCC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
We encourage investors to review, our regulatory filings, including the Form 10-Q for the quarter ended Septemberthirty 2019, when it is filed with the FCC.
During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the companys financial performance.
These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with gap.
A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release, and our investor presentation on the H.L. Dotcom website.
Hosting the call today, we have Scott buys or Houlihan, Lokey, Chief Executive Officer, and Lindsay Alley, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call the questions.
With that I'll turn the call over to Scott.
Thank you Christopher Hello, everyone and welcome to our second quarter fiscal 2020 earnings call.
Considering ongoing volatile macro economic and political factors, we're very pleased with the firm's financial performance and the second quarter fiscal 2020.
This quarter, we generated 273 million in revenues with a record second quarter revenues in both corporate finance and financial Advisory services, and we had a solid quarter and financial restructuring compared to an exceptional second quarter and financial restructuring last year.
Adjusted earnings per share were 70 cents for the second quarter, and we announced our quarterly dividend of 31 cents per share for the third quarter.
Record first half revenues of 523 million are up 6% when compared to the first half of last year and we entered the second half of fiscal 2020 with good momentum across all three of our business lines.
We believe there are a handful of factors that have contributed to our continued solid results.
We remain committed to a diversified business model that reduces our reliance on any one banker one product one geography, one client one transaction or one industry.
As a result of this differentiated platform. We believe we continued to gain market share and grow our corporate finance and financial advisory businesses, while maintaining a natural hedge against an economic downturn with the largest and most diversified financial restructuring practice on the street.
Despite the natural starts and stops of the restructuring marketplace. We believe the future business opportunity is very large and still growing.
Our focus on the mid cap space in corporate finance is unique among our publicly traded peers and results and less volatility greater client diversification and provides a very attractive platform to continue to grow our business and while we're not immune to the impact of current trade disputes the size and types of our.
Investment banking transactions are likely less impacted than larger cross border deals.
Our financial Advisory services business, which produces hundreds of distinct see events per quarter helps contribute to the firm's diversification and enhances the reliability of our revenues through the market cycles.
Our continued focus on improving client relationships and utilizing industry expertise in Fas has contributed to expanding our revenues per M D to record highs.
Finally, although our stated goal is to continue to diversify internationally. The vast majority of our revenues are still U.S. based and the U.S. continues to remain the most vibrant deal marketplace for our business.
However in this environment, we are keeping an eye in factors that may put pressure on our results in the future.
The political environment in the U.S. has become more difficult and uncertain, while we have not seen it yet as we move towards the 2020 elections on certain he may weigh on executive confidence and may affect corporate transactions, depending on the outcome of the elections future changes in corporate and individual tax policy could have an impact.
On client result, and transaction motivation, particularly with respect to our financial sponsor clients.
Historically, when we have had challenging business environment or economic or political dislocation our business mix has mitigated the effect of these challenges.
In spite of Inspite of the challenges in today's economy and as a result of the strength of our platform. Our three business segments have done quite well year to date with adjusted reported results retained client mandates and pipeline prospects all showing growth year over year.
During the quarter reroute right recruited to managing directors and corporate finance, one joining our private funds group and one joining our capital markets effort.
We continue to look for talent to grow our capital markets business and we believe it's one of the most exciting areas for us to grow the firm over the next decade.
In addition, we continue to higher in the UK in Europe and in fact, our London Office is now our second largest office after New York.
Port our growth in this part of the World I'm pleased to say that during the quarter, we opened our new London headquarters and consolidated all of our bankers into one location.
Regarding acquisitions, we remain very active enter in various stages of dialogue with potential targets that we believe will help us continue to achieve our stated goals to that and yesterday, we announced that we have agreed to acquire Freeman and company and New York based independent advisory firm that provides corporate finance advisory.
Services to companies in the financial services industry. The acquisition is expected to close following regulatory approvals.
Lastly, on the shareholder fraud, or Ics, which has been a significant houlihan lokey shareholder since 2006 sold its last shares in our firm and a July block trade.
Works was instrumental in the development immaturity of our business over the years and very supportive of our collective decision to go public they've been a great financial partner and we think them for their leadership support and relationship over these last 13 years.
Overall, we are happy with the quarter and we continue to believe that we offer our shareholders a unique business model that will allow us to achieve solid financial results through all market cycles and with that I'll turn the call over to lenzi. Thank you Scott.
Revenues in corporate finance were 156 million for the quarter.
7% when compared to the same quarter last year.
We closed 69 transactions in the quarter compared to 62 in the same period last year and our average transaction fee on close deals with slightly lower this quarter versus last year.
Financial restructuring revenues were 77 million for the quarter, a 17% decline from the same quarter last year, which you'll recall, we're going exceptionally strong second quarter.
We closed 17 transactions this quarter compared to 20 transactions in the same period last year and our average transaction fee unclosed deals with lower compared to the same quarter last year, we would like to remind everyone of the lumpiness of our restructuring business across quarters as it is often driven by the timing of large fee events.
In financial Advisory services revenues were 40 million for the quarter, a 9% increase from the same quarter last year.
We closed on 523 feet events during the quarter compared to 469 in the same period last year.
New business activity in Fas remained steady and we've continued to see improvement in managing director productivity in our Fas business.
Turning to expenses, our adjusted compensation expenses were 165 million for the second quarter versus 169 million for the same period last year.
Continuing this quarter, we adjusted for pre IPO grants and for the deferred payments primarily related to acquisition agreements associated with our two fiscal 2019 acquisitions.
The adjusted compensation ratio was 60.7% for the quarter within our targeted range between 60.5, 61.5%.
Our adjusted non compensation expenses in the second quarter were 44 million versus 41 million for the same period last year.
Year to date, our adjusted non compensation expense ratio declined 15 point to 15.6% versus 15.8% in the same period last year.
As we've mentioned in the past our adjusted non compensation expense ratio typically runs higher in the first half the year and lower in the second half of the year because of our revenue seasonality.
Our long term fiscal target for the adjusted non compensation expense ratio is between 14 and 15% annually.
This quarter, we adjusted out of our Noncompensation expenses three items.
First approximately $250000 and primarily legal and accounting costs associated with the register block trade, which we completed in July 2019.
Second 1.7 million of acquisition related amortization.
And third 6.8 million related to the consolidation of our London bankers into a single New London headquarters.
Nonrecurring expenses associated with this move our permits are primarily the write down of the lease assets and fixed assets that are no longer in use.
In addition, we adjusted our we adjusted our occupancy expenses in London as if the consolidation and move occurred as of July 1st the first day of the quarter in order to best reflect the going forward occupancy costs for our London location.
Our adjusted other income and expense line item resulted in a game for the quarter of approximately 1.1 million versus a gain during the same period last year of a million.
Our income in this line item for the quarter was primarily a result of interest income on our cash balances throughout the quarter.
Our GAAP effective tax rate for the quarter was 28.4%, which is consistent with our targeted range of between 20, 729%.
Turning to the balance sheet and uses of cash.
As of the quarter end, we had 305 million of unrestricted cash and equivalents and marketable securities.
In the second quarter, we repurchased approximately 479000 shares at an average price of $43.80 per share as part of our share repurchase program.
As a reminder, a significant portion of our cash will be paid out as deferred cash bonuses in November two our banking staff.
Each year bonuses paid in May two our baking staff include both the deferred cash element and a deferred stock element.
This November payment represents the deferred cash element.
And with that operator, we can open the line for questions.
At this time, we will be conducting a question and answer session. If he would like to ask the question. Please press star one on your telephone keypad.
A confirmation total indicate your line is in the question Q you May press Star too if you would like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith.
One moment, please while we poll for questions.
[noise].
Our first question comes from the line of Devin Ryan of JMP Securities. Please proceed with your question.
Great. Good afternoon, Scotland's how are you guys.
Yes.
So first question here last quarter you cited.
There was kind of a lack of a clear trend I think it's how you framed it in the middle markets.
At the moment and those lead leading to a little bit less steady M&A activity and so.
When I listen to call here in the prepared remarks, it sounds like.
There's been a little bit more clarity recently in the backlog screen growing so I'm just curious you something shifted.
Today versus three months ago, where you're feeling better about at least the business at the moment I understand that.
Obviously, theres plenty of macro dynamics that could create uncertainty the future, but obviously it felt like a little bit different tone on this call maybe a little more constructive so I'm just trying to understand if I'm hearing that correctly.
I think thats, a fair perspective, probably feel a little better about our corporate finance.
Opportunities for the foreseeable future today than a quarter ago, but still believe that weve continued to see the changes in the wins from tailwinds to headwinds and vice versa. So.
So yeah, it's a little better today.
Don't know what tomorrow will bring but opportunities to do feel a little stronger today.
Got it appreciate it.
Then a follow up here just on the restructuring business you hear some of the messaging there as well you know there's some high profile assignments. We can also you in the press that you guys had been named on and so I'm sure that helps a bit but you are more broadly are you seeing.
An acceleration in activity and it sounds like Youre, finding pockets of dislocation. So I'm curious kind of where those are just again any other ways you could frame kind of what's happening in that business would be helpful.
I think we still see the the long term opportunity set is continues to grow total amount of indebtedness up their potential problems that we feel may eventually evolve with certain circumstances and I think it's much what we've said in the last couple quarters.
There are some pockets clearly in a few industries that theres still all the various technology Disruptors theres, Sir some companies would just ultimately too much debt.
Management issues fraud issues.
The whole series of issues that have occurred but we're still by no means neither ourselves new our peers do we believe we're in a robust restructured environment.
We think we've done very well and still a very low default rate and there is still I would say the ongoing trends or some new pockets of restructuring activity.
Got it okay, great and then did last modeling one here Lindsay I apologize if you went through this but on the other operating expense I know that can.
Be a bit lumpy, but I didn't hear anything flag, there, but that did step up from from last quarter decently. So I'm just curious.
What was in that number and kind of how to think about a go forward for the other expense.
This is our kind of below the line other income and expense line item that you're talking about.
I'm looking at other operating expenses.
Within our non within our non compensation expense line, yes, exactly within non compensation.
So I think if you're looking at the GAAP results part of the add back relating to the London move is incorporated in both rent and then also in other operating expenses. So there is.
An increase in that primarily driven by the the London move and that has been a judge that part of our adjustment includes other operating expenses as well as rent.
Got it okay that makes sense, okay terrific. Thank you very much guys.
Our next question comes from Michael Brown of KBW. Please proceed with your question.
Hey, good afternoon guys.
So just wanted to follow up on the on the non comp.
Yes that surprise to see how to increase this quarter. So appreciate the color LNG on the seasonality there.
Could you just give some additional color on what was driving increased in the I T. In communication expenses this quarter.
That increase sequentially.
Yes so.
So beginning gosh I don't remember one or two quarters ago, we classified historically, we reclassifying some consultants under.
[noise] professional service fees, and we reclassified them under IP service cost because we thought they were more related to that line item and so you're seeing an increase in IP and kind of if you look back over quarters, probably a decrease in professional service fees and it's simply a reclassification.
Okay. That's helpful.
One of your your peers had kind of mentioned that some of that.
Yes.
[noise] expansion timing issues. It sounds like maybe the time to close was elongated on some of those transactions and that was an issue that you guys experience at the beginning of the year.
Let's kind of curious if you had seen any of that occurring in the quarter.
Or if you're seeing any pick up in that or any deals being shelved at all.
And we mentioned that Deb I think it was two quarters ago that we saw some delays and timing really have not seen that in the last quarter I'm. There's always a subset of clients that are transactions might not close or get a little longer dated but nothing out of the ordinary and this particular quarter.
Okay, great so sounds like nothing systemic there.
And then just one last one on a Freeman and Enco I'm, just kind of curious how many employees and Mds are expected to join land once that transaction is closed.
We announced that there will be at two Wendy's and one senior adviser.
And it's like many of the other acquisitions, it's a effectively a mid sized group that will add to our bench strength in the fig industry.
Great. Thank you for taking my questions.
Okay.
Our next question comes from Brennan Hawken of UBI.
Please proceed with your question.
Good afternoon, Scott only thanks for taking the question.
I just have one on restructuring you know it let me think about restructuring and modeling. This is obviously a really lumpy business.
It's one that's prone to large fee events, even though I believe recently you've indicated that.
There's been some diversity in the size you know some some smaller fee.
Mandates in there.
And percentage completion and such.
Is there a good way to think about modeling this quarter to quarter or is this just something where we should as.
As analysts to the company just be resigned to understanding but quarter to quarter, we can.
Not always understand how it might move around year to year in quarter to quarter and comparisons are tough when we should just look at a at a rolling average.
Any insights on that front.
I think we're all better off probably looking at some rolling average, whether that's 12 months or whatever timeframe you want to use we don't have a whole lot of control on the timing of closings in restructuring and I think unlike in corporate finance, they're not is often impacted by calendar year end issues for tax reasons.
Or even fiscal yearend issues and so we do find its a little tougher to.
Predict from quarter to quarter standpoint, I think historically, you could look at our fast or corporate finance business and see that it does have certain seasonality to it much harder for us to gauge.
Any particular quarter versus another quarter and restructuring.
Okay. Thanks, Thanks for that I appreciate it and generally it seems it seems as though the outlook.
No remains.
Pretty steady there.
Continuing to see good levels of activity. Despite the low default environment is that fair is there any shift in.
In that business since last quarter or any additional color you can give on how that market has developed.
Yes, I think Brian as we sit here today similar to Scott's comments regarding corporate finance, we probably feel a little bit better about our restructuring business for the balance the year than we did three months ago.
Okay. Thanks very much.
Brian [noise].
Our next question comes from Jim Mitchell of Buckingham Research Group. Please proceed with your question.
Hi, Good afternoon, guys, maybe just a question on them.
Yeah.
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Exposure to the private equity client base.
Any sense on how they're feeling I think earlier this year there was some.
Hang over from from that group and worried about valuations as the market.
Rebounded, what's your sense with client base.
Age pretty aggressively with lower rates, how do we think about the activity levels in the private equity buyers.
I think they that clearly picked up from the.
Negative stock market activity at point to kind of December of 2018 of kind of recent lows.
That being said I think for the last year or so when they're out buying businesses. They do model in some kind of a downturn in the economy case that they might not have done 345 years ago. So thats a.
Vantage point that they have but in terms of activity, both buying selling raising capital being able to procure capital for transactions that are doing we still see it as a effectively a healthy marketplace.
There's not a lot of.
Valuation discrepancies holding things back.
No I don't really think theres, a huge disconnect between the buying and selling the world at least as of now.
And then maybe Lindsay just on just another question on just the.
Our fee.
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Charges and how do we think about.
She said it split between.
I think you only disclose it.
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For us to know what can you help us with the run rates in both those.
Expense lines for modeling purposes.
Yeah. This is not going to be exact but I would say, it's probably about a million dollar of the.
Of the add back is in your other operating expenses and the bounces in rent.
Theres, maybe a little bit in a couple of other categories, but thats, probably the easiest way to think about it.
That's helpful. Thanks.
Our final question comes from the line of Jeff Harte with Sandler O'neil. Please proceed with your question.
Excuse me good afternoon guys.
A couple from me I mean, we're kind of did not have top a lot here, but as we look at not top is the current quarter. The last quarter's 44 million a pretty clean starting point for us to think about trending forward and do kind of a historical seasonal trends that we've seen as far as this quarter rolling into next quarter that you think that general historical.
Trends should still hold percentage change was.
So I think the historical trend no reason to believe that shouldn't hold and I think this is a pretty clean on an adjusted basis.
Pretty clean quarter for non comp expense.
Okay, that's relative to second quarters of previous years.
Okay.
As far as the competitive environment goes and I'm thinking primarily in kind of the middle markets corporate finance I suppose restructuring as well, we keep hearing more and more from bulge bracket firms kind of trying to move into the middle market really focusing of smaller transactions have you noticed a a change in the competitive environment, there and I guess just as much.
Specifically are you seeing more of the bulge bracket firms trying to compete in the middle markets.
So we get this question a lot and you may be hearing about it but we're not seeing it I think that largely the disconnect is when the bulge bracket talk about the middle market. There are still aiming higher than our average transaction size, that's not to say, we don't compete against both bracket firms.
But when we're competing against both bracket firms that said the very high end of our range or I would say our normal range of clients and and further the vast majority of the transactions that we work on we just don't see the bulge bracket and I don't believe that when they talk about middle market. That's the size range, they're talking about.
Yeah.
Okay, and I suppose lobs.
But weve talked started restructuring as well.
You guys are established sleeker, though it seems like.
We talk to is not trying to build up restructuring. It. It's as you noticed any change in the competitive environment, there's more work from seen before restructuring though.
You still think the core competitors that we run a crossed are pretty much. The same today as they were three years ago or five years ago.
Thats not to say that there are some other.
Probably a newer entrants are smaller firms that are in it but the core players I think it's a very stable group over the last half a dozen or so years and haven't really seen any new competition meaningfully impacting the type of business that we're pursuing are winning.
Okay. Thank you.
I think Jeff.
Thank you for your questions I will now hand, the call over to Scott Bizer for any closing remarks.
So I want to thank you all for participating in our second quarter 2020 earnings call and we look forward to updating everybody on our progress when we discuss our third quarter results for fiscal 2020 this coming winter.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.