Q4 2019 Earnings Call

Good day, and welcome to the Greenhill fourth quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by six zero after today's presentation. There will be an opportunity to ask questions to ask you a question. You may press * then 1 on your touchtone phone to withdraw your question, please press * then two months. Please note. This event is being recorded. I would now like to turn the conference over to Patrick's head of investor relations, please go ahead.

Thank you. Good afternoon. And thank you all for joining us today for Green Hills fourth quarter 2019 Financial results conference call. I'm Patterson hold springhills head of investor relations joining me on the call. Today is Scott, 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 the actual results and financial condition. May differ possibly materially from what is indicated in those forward-looking statements for years 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 box 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 heavy duty to update any of these forward-looking statements after the date on which they are made of now like to turn the call over to Scott back. Thank you Patrick. We reported fourth-quarter revenue of 106.7 million dollars and operating margin of 39% and net income of a dollar $5 per share for the full year. We had revenue of $301 and operating margin of 15% and net income $45 a share our quarterly Revenue was up 20% and earnings-per-share was up 133% from the same period last year for the full year. Our Revenue was down 14% And earnings-per-share was down $68 in some we had a strong finish of the Year resulting in respectable full year results on the top and bottom line all consistent with our commentary on the past couple of quarterly investor calls.

Well industry data shows a decline.

And a global transaction activity versus the prior year and almost all of our competitors have reported declines in advisory Revenue the primary driver and are reduced revenue for the year. Was that lower Revenue in Europe more than offset wage increases in Revenue in North America Australia and the rest of the World by type of advice. We benefited from significant Improvement in restructuring advisory Revenue relative to recent years as our recently enlarged team increasing traction throughout the year our Capital advisory team had another strong performance. They'll fell short of the prior Year's record Revenue level in an m&a results were relatively strong nearly everywhere other than in Europe by industry sector. We had good results in consumer products financial services and media offset by weaker results in energy Healthcare and Technology with respect to costs are compensation ratio for the 59% slightly above our Target level as a result of lower revenue for the year for the quarter of the compensation ratio was an unusually low 42% in order to offset unusually high ratios and wage.

first two quarters of the year

An objective as always is to achieve a reasonable compensation ratio and a full year basis while also ensuring that our team is appropriately compensated at competitive levels relative to their individual performance pack our non-compensation operating expenses for the quarter of $21, which was three point seven million dollars higher than the same period last year due to some foreign currency related losses compared to games the prior-year off with a charge for an uncollectible accounts receivable from a client in financial difficulty for the year. Our non-compensation. Operating costs were very similar to last year is the above-mentioned unusual cost. We ran off about the same size of the unusual cost of the prior year when we incurred an accounting charge related to the earn-out on our acquisition of coaching. We continue to monitor non-compensation expenses closely am hopeful to achieve a lower annual level in dollar terms in twenty-twenty. Our interest expense for the quarter was somewhat lower than for the same period last year as the incremental cost of an increased level of borrowing off.

Was more than offset by the impact.

Lower Market interest rates and a lower coupon premium on our debt following are favorable refinancing early in 2019. We expect our interest expense to continue to decline going forward effective tax rate was 33% for the quarter and 40% for the year. Our tax rates for both periods were negatively impacted by the fact that we had a significantly lower than typical portion of our revenue and profit and loss tax rate jurisdictions, particularly the UK and a higher than typical portion of our revenue and profit and higher tax jurisdictions. Particularly, Australia and Brazil are rate for the year was also negatively impact of unfavorable difference between the grant price and market price on investing restricted stock units. We continue to expect a rate generally in the mid 20% range going forward in terms of capital returns continue to aggressively repurchase shares given our view that the market is underestimated our earnings potential as well as the fact that our stock trades that evaluation multiple below that of our peers and Far Below it still dead.

historic valuation multiple level

During the quarter we purchased 1.5 million shares in share equivalents in an average price of $15.98 per share for the full year. We purchased 3.8 million shares in share equivalents at a young age price of $18.04 per share for 2020. Our board is off right sixty million dollars and purchases of shares in share equivalents which compares to $69 million dollars. We spend for such purchase during 2019 and the quarters a date we have repurchased 345723 shares of common stock at an average price of $16.40 per share with a 5.7 million dollars in total meaning we have repurchased authority of 54.3 million dollars left for the remainder of the year. We also declared a quarterly dividend for the quarter of $0.05 per share off. We ended the year with cash of $114 in debt of 365.6 million dollars a meeting. We had net debt of 251.6 million dollars as of yesterday our cash money.

Was up to $133.

Three point nine million dollars despite the incremental share repurchases in January with a debt amount unchanged are required principal payment obligations are modest until maturity of our debt in 24, but based on our business Outlook is described below. We are aiming for significant deleveraging during 2020 alongside the additional share repurchases referred to above we enter 2020 with a favorable Outlook across all of our businesses the environment for m&a activity currently feels positive across the regions that perform well for us in 2019 in our current book of assignments in Europe indicates the potential for a very nice rebound and revenue there this year and restructuring advisory. We ended 2019 with a much-improved level of monthly retainer fees and a much larger backlog of assignments that should get to completion wage 2020 recent tightening of credit availability and increasing cost for borrowers with weaker credit ratings should also be a positive factor for this business.

In capital advisory the continued growth of pools of private Equity capital and the increase Market liquidity available to Chief investment officers that are invested in those funds should result in a continuing favorable operating environment for that business as well. I'll close with a few words on our strategy. We remain focused on building a business with increasingly Diversified revenue streams and greater aggregate Revenue. That was the purpose of acquisition of capital advisory specialist cogent Partners almost five years ago. That was the purpose of the recent expansion of our restructuring advisory team. That was the purpose of last year's expansion of Singapore and France and that is the purpose of our continuing of recruitment of m&a specialist across various industry sectors recruiting will continue to be key to our growth plans as well the continued development of talent internally in the past. You'll get an F5 client base of managing directors such that we have 79 today and we increase our total professional headcount by 11% We have all the tools needed to continue to successfully Implement our strategies.

our culture makes our firm

Place to work leading to both recruiting success and very high retention rates for strong performers are brand for high-quality and independent advice has been built over Decades of client service and our team collectively owns 45% of the economic value of our firm through common stock and restricted stock and is there by highly incentivized to generate strong results and create value for all shareholders now, I'm happy to take any questions.

2 SE question, you may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then Thursday.

The first question comes from Devin Ryan from JMP Securities, please go ahead.

Great. Hey Scott, how are you? Good. Congratulations on a nice end of the year a couple of questions. I guess first one. I heard your comments on Thursday and I'm curious just to unpack that a little bit is the recovery you feeling like a function of just it was a low bar in 2019 or is Europe feeling awful, you know quite strong on an absolute basis and and any more context you can provide around what you're seeing and hearing in Europe as well be appreciated. Yeah. Sure. I think there are two things going on with our own business in in Europe one is that you know, as always it's somewhat random when the specific, you know deal closings end up falling. So we had a very good year in Europe in 2018. We had a very weak year in Europe in 2019, and and that really largely has to do with just the the timing of of various transactions. We've been working on weeks off.

20 as I said 20

22 looks you know very substantially better than last year and you know really in any absolute terms. Anyway, you want to look at it. We're really quite optimistic about Europe apart from that it kind of just the general random someone when you know, our clients end up transacting, you know, they're clearly as a better environment in Europe. I think having you know brexit at least to some degree resolved after well turn out to be many years of uncertainty on top of that having, you know, the UK election, which looks like it could have a wide range of outcomes a few months ago, you know, certainly having what I would call a business-friendly outcome to it. So I I think there are some really fundamental reasons why business should get better in Europe, but I think given on top of that it was just, you know, it was just an unusually quiet year for us and I think regardless of the environment in in Europe, I expect that a very substantial rebound than 20 20

Got it. That's helpful. Thanks Scott. Just a follow-up, you know the comment about the market under estimating the earnings potential when I look at consensus 5020. It's it's about a dollar seventy and yeah, that would represent recently good year for Greenhill. Just if you go back over, you know the past handful so I'm kind of curious how you guys think about earnings potential and if there's you know a year or they would point to have kind of revenues that you you would say kind of represent kind of a normalized level or or kind of the right level to think about just in a context there would be helpful.

May I can't be more specific in plenty of the specific?

Numbers of course, but look I I would say I don't I don't think there's really any past. To look back to I mean what what's changed about the way our affirm has evolved in the last, you know couple of years really wage, you know, number one. We've got this, you know, very substantial Capital advisory business which you know, we we didn't have obviously till we acquired it almost five years ago, you know that's proven to be a really strong and reliable performer over five years. I think secondly we always had you know a presence in restructuring but it was a very small business for us, you know, we starting about eighteen or twenty months ago. We we really dramatically increased the size of that group and you know, by the time we got to the fourth quarter of 2019. It was clear that was going to be you know, a really significant third Revenue generator for us alongside Capital advisory. And then it's lastly if you just look at the the kind of the regional variations and m&a, you know, it's been a relatively quiet. For some years and Europe relative to the birth.

and last year was a particularly quiet year for us, but

I think if you if you assume that you're going to have something at the little more representative across the regions of what the the teams are are are capable of their then look there's there's a lot of off-site in terms of how m&a would look on the global basis versus last year and then you add to that a growing restructuring business and a you know, what's been improving contributor in capital of Missouri. And you know, we add that off to being, you know, pretty optimistic about our future here got it. So just to to maybe a different way if I think about kind of the revenue potential you have more today than you've had in the past is the view that there's more Revenue potential in The Firm today than historically or or you know might not catching that right.

No, I would say definitely I mean, we you know historically we've never had a really substantial size restructuring team. I think in Europe, we've never had a stronger team. They're not notwithstanding that last year was a difficult year. I think the team in terms of breadth and depth is is better than it was even in the pre-crisis years for sure. And you know, we've got the the the capital advisor business office. So, you know, we've got lots of other initiatives to to to improve things and certainly we've we've upgraded as as you know, with every firm in our business as every single year in terms of trying to you know, put the best team on the field that you can each year. But yeah, I think we're the potential of this firm is certainly greater than it has been historically which is why I don't point to Any Given year and say, yeah, that's the year. We want to emulate five years. We want to emulate are, you know better than anything you've seen for the last decade by, you know, a meaningful margin.

Okay, great. Thanks Scott. I'll hop back in the queue. Thank you.

The next question comes from Michael Brown.

From KBW, please. Go ahead.

Hi, good evening, guys.

Hello.

Hey Scott, if you could just first start on the on the revenue results this quarter just wanted to get a little bit more color on kind of the areas of strength, you know, by region and and by type of sounds like it was a good contribution from the tone on m&a advisory businesses. And then as it also be helpful, if there was any, you know, pull forward activity. This quarter just says we're going to think about modeling for the next quarter sure, you know, just to start with the last part of the question cuz it's really the easiest there was nothing material that was pulled forward in and and accounting sense or or even in a you know, sort of things accelerating and getting done more quickly. I mean frankly, you know, there there were there were times in the club actually expected to do materially better but, you know deals get delayed that always happens in our business and but there certainly was nothing pulled forward for perhaps some degree the opposite in terms of where we did well wage.

Literally expectations were lower. And if you look at the database that I know some of our animals like look at they were very substantially lower than what reality was.

And I think you know, it really came from all three businesses. I think Capital advisory, you know had a a good, you know, very good year but also a very good fourth quarter of the restructuring business, which we invested a lot in as I said about eighteen months ago had a performance that just got steadily better throughout the year and by the fourth quarter was, you know, very significantly better than word had the beginning of the year, but also an m&a again outside of Europe it was it was quite good and I think in some places where maybe the databases aren't quite as good it's sort of monitoring things. I know we had a a good our best year ever in Brazil and a lot of that fell in the fourth quarter. We had our best year in many years in Australia and you know a lot of that sort of fell in the in the back half of the year and you know, they said we did we did reasonably well in the in the US and other markets also really just with the one outlier and the negative side being Europe so so it was dead.

Pretty much across the board and I think a whole bunch of things that added up to a number that was quite a bit better than what most were expecting.

Okay, and just a follow-up on on that how much of your revenues and I guess you know, just maybe the recent quarters have been from some you know, some of the non imminent advisory wage is just from coaching and from and from restructuring, you know, I know it probably changes quarter-to-quarter, but if you kind of gave a range on that, that would be helpful.

You know, I I don't I don't really want to go into more detail than that. I mean, you know, one of our competitors used to break out restructuring advisory unlike anybody does so I guess Houlihan Lokey still does because for them it's such a large part of their their firm, but I think the other ones the more m&a oriented firms, I think have have have not done that for the reason we've never done it which is that it's very hard to draw the line between an m&a on a restructuring give they're just so much overlap between those areas where you have, you know industry Specialists managing directors in and the m&a side who are helping win business and do business and restructuring. So so it's hard to say me we do break out Capital advisory and you know, that number has been north of fifty million for three years in a row in terms of the revenue level there, uh, and and the the secondary business we acquired five years ago and in restructuring it's you know, I can say it's certainly significant and it's becoming more significant wage.

You know as we speak, I think 2020 will be you know, there's material upside relatives 2019 for them, but it's hard to quantify.

No any further than we do already?

Excellent. Just one last one for me. Just wanted to dive into the MD head count. So last quarter you ended with $79 MGS this quarter looks like a promotion promoted five in your at 79 MDX currently, so is the Delta they're just retirement driven. And then as you think about 20 20 or you still targeting, I think it's Thursday about 10 plus or minus net additions in any given year. Yeah. Yeah, I would say the target is roughly the same thing. But what happened in the fourth quarter in terms of sort of accounting for pluses and minuses and managing director of mostly was a number of people moving from managing record a senior advisor status, which is not a retirement move, but it's maybe a a later in the career moves. So there's no one I can honestly say for all of 2019 and 18 that that was, you know, a voluntary departure that had a massage.

impact or material potential in

Impact on our firm. So, you know, we've done really remarkable job or retaining our best talent and as people, you know do get later in their career though. Some people will move to a a little bit different status on a senior adviser and and that's really what you saw at your end just as the new class of folks got promoted a managing director.

Thank you for taking my questions. Okay. Thank you. The next question comes from Jeff from Piper Sandler, please. Go ahead.

Good afternoon from me one kind of just clean up wise non cop expense if we kind of take this quarter's 21 million and back out the two-page you broke out it gets us to like 18 and 1/2 million. Is that kind of a reasonable base to to build off of going forward? Yeah. I think that's pretty reasonable. We we we we have like, you know, like a lot of firms who have taken a close look at all that stuff and you know this year we had some years ago have a little bit of sort of foreign currency gain some years some losses this year of flip from a game to a loss and and we had bought something it's very unusual for us one, you know one situation involving a reserve on a on a receivable receivable which might in the end who knows may may end up getting paid but you know, we try to be conservative on that sort of thing. So I think if you take those out you're in a pretty good base roll we expect going forward.

Okay, and you mentioned kind of capital advisory or Capital markets? Can I have a strong quarter? And I know we're kind of used to looking at a cogent and kind of being guided so used to be close to $40 a year Revenue. Excuse me. Can you resize that secondary business at all for us or just look at a similar to the size it was or is it become meaningfully bigger?

No, it's it's definitely become meaningfully bigger. I mean they I would say the first you know, we bought it again going back to sort of the way. We structured the earn-out that we originally put on the deal. We bought it on the basis that it would turn out to be active transaction for us and they would get their earn-out payment. If they if say achieved about forty million dollars a year Revenue run rate for the first two years, you know, they got off as close to that as you can possibly get without quite getting it in the next two years essentially when you know north of fifty million the north of sixty million and and last year sort of settled back to the house to the low 50s again, so, you know, certainly if you look at the last three years you would say that's no longer a forty million dollar Revenue your business, of course all businesses are cyclical and can be impact any given year but you know, the the recent data would suggest that you know, we we now hope for that to be a a comfortably fifty million dollar plus business for us.

Okay, and kind of looking at the revenue lockout outlook for 2020.

What do we look at kind of the visible transaction pipeline which admittedly can can be a dangerous Pastime? But if we kind of take out really the largest transaction at least the companies don't think we'll close till early part of next year. You know, we're looking at a pipeline that most work respect of looks weaker than it's been in a while. Can you kind of help walk me through what we're missing here. Is it invisible stuff? Is it ma'am. It's a tough to be announced cuz your outlook kind of tone sounds more optimistic than at least what we can see from the outside.

Yeah, and I look and I guess that was really the case for Q3 and for as well, especially Q4 when when expectations were so much lower than the reality, you know, look I think it's a lot of things. I think there certainly are a lot of things we're working on that we have, you know, strong expectations for announcements that will lead to transactions this year. We as I said are expecting another good year and a capital advisory. We're expecting to continue to build momentum and restructuring and we've are seeing a more kind of diverse Geographic contribution from the markets where the the databases aren't quite as good at picking up all the, you know, the the transactions that get announced that may not, you know, make the Wall Street Journal or something, but they, you know, they're important in whatever region of the world. So, you know, it's a lot of small little things and hopefully if you've big things sprinkled in there that that lead us to be, you know reason would be reasonably optimistic. Obviously. There's a long year ad so we'll see how place

South but, you know, we feel very good about the the book of assignments that were working right now.

Okay, thank you. Okay. Thank you.

The next question comes from Richard ramsden from Goldman Sachs, please. Go ahead. Thanks. This is James yarrow filling in for Richard. The first question is I guess the tone around this call as well as for the piers. This earnings season is has been you know focused on Europe on the m&a front. Is there any dialogue that you've heard? Can you talk about the the client dialogue in a in the environment especially in light of the fact that the industry data for January has been significantly worse and obviously, you know understanding that doesn't necessarily reflect your business.

Yeah, yes. I I think you know, like I think the reason we and perhaps other speak of Europe more than you know, it has been a reasonably good environment in the US for for some years now he's and and we at least continue to feel I think a lot of our peers do that. It continues to be a pretty favorable environment in the we've got low interest rates certainly ready available availability of credit for most companies. You've got relatively High share prices, you know, pretty good economy and and reasonable growth rates and and all those things that that probably generally suggest a pretty good m a i think the reason I highlight a bit more and perhaps some others do Europe. It's really just the the change there where it's been a long period post financial crisis of weaker activity. There's us there have been all kinds of good reasons for that including brexit and elections and slower growth and all that. But if you look at this particular moment when it seems like some of those uncertainties were taken away and Thursday.

look, you know into our own backlog of assignments that you know, it just feels like there's a material change in your

Whereas in the US it's maybe a continuation of what's a pretty good market now as to the the first month of the year. I take your point that activity looks awful anemic it did last year as well. And I don't know why this is occurred two years in a row, but you know last year if you looked at the data for January or even January and February it looked like it was going to be a dreadful Year by the time we got off all the way to the year end at looked like M and activity was down more like 10% really not that different at all from the prior-year but seems really ramped as the year went on and you know, so I I wouldn't all I'm saying I wouldn't draw any conclusions positive or negative from a month of activity in the m&a market, certainly what we were seeing in the US and and increasingly in Europe is, you know, a pretty good environment for deal activity.

Got it. That makes sense. Were there any significant pull forwards of deals in this quarter?

No, okay, and then the final cleanup one is in the past. You've given the interest income number for the quarter. I know that it wasn't in this release. Is there any way you could size that to the quarter back? I would just call a trivial really we you know, we we we've tried over the years. I mean we used to many years ago be in the investment business in a pretty big way and and then for years we broke on investment income and then live off the interest in, mean we're we're actually had become over time. I very simple business and in today's very low interest rate World interest income is is really trivial for us. So we we decided it was easy as to just have one line of Revenue. We don't really have in some ways different lines of business. Yes, m&a restructuring and Capital Advisors are all somewhat different but you know, they're all advisory and they all overlap each other in various ways. So so we just Consolidated on the one simple light.

Got it makes sense. Thanks a lot. Okay. Thank you. And thanks everybody for calling in and we'll speak to you next quarter.

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

Thursday