Q1 2020 Earnings Call

Thank you Patrick. We reported first-quarter revenue of 67.1 million dollars an operating loss of two point seven million and a loss per share of $0.40. The revenue figure was 31% higher than that, but significantly lower than what our Outlook indicated a quarter ago, the negative earnings-per-share figure was exacerbated by two factors and unusually low tax rate and the fact that our basis rather than fully diluted Shares are used to calculate EPS in a loss scenario are fully diluted share count is 3.1 million higher than our basic shares outstanding figure before I go into more detail on our results around look. I want to provide an update on our operation since the covid-19 virus started impacting normal operations. I'm very pleased to report that while our 17 office locations of essentially been off.

I think what's different from us than most peers, is that their business in 20?

Nineteen was probably relatively flat versus 2018. I mean 2019 it was not a big year of restructuring activity. However for us we had just stepped up in a really long way the size of our restructuring team. And so 2019 was a year of significantly increased restructuring activity for us and we entered 20-21 a substantially greater backlog than than we had certainly a year prior to that and you know, even more large compared to you know, two or three years prior to that. So I think unlike. We sort of came into this year thinking we were going to see a substantial increase in restructuring revenue for the things that we worked on, you know over the course of last year and we of course had no idea covid-19 was coming or I was going to be a whole, you know, raft of additional restructuring projects that would ramp up, you know, pretty rapidly the the retainer fees were seeing. So when I talked about sort of completion fees and the first half of this year birth,

In restructuring, you know, those are things that relate to work that we mostly did last year the things we've been hired on in the last five weeks, you know, some of those I would expect we'll get to completion later this year and and a fair number of them on. We'll be we'll we'll get to completion next year which is why I think that even though we'll have I I think substantial Improvement in restructuring this year. I think next one will be even better just because you know, probably from this point forward to sitting here on May around May one almost every new piece of business we win is probably going to be something that closes Club next year. So that's the difference really is that a totally apart from covid-19. We just had a very substantial increase in the size of our team and that led to a lot more business last year and and now covid-19 it just adding further to that.

I appreciate the clarification there. So on the expectation for the second half to be stronger.

Anyway to kind of parse through how what kind of magnitude is it. You're You're Expecting there and in in kind of how the quarterly trajectory kind of play out from here. I you know understand that it's, you know, very uncertain times, but just trying to understand is it is it just a function of a very very very weak second-quarter and and kind of a return to more than normal Revenue environment in the second half or you know, how should we actually think about it? I mean, I I see the office first I see just kind of the year really into haves and I you know, I I didn't say we expect a very very to quote you weak second-quarter, but you know, it's it's and I think I've given about guidance is really I can give but what you know, what I did try to do is say for each of our three businesses, there are reasons to believe and of course, there's all kinds of uncertainty that world but there are reasons to believe today that each of the three

Should do materially better in the second half of the first step for three completely different reasons one.

Is that you know on the m&a side, we have some large transactions working the way through the pipeline. Hopefully those get done secondly almost anything that develops an m&a as Thursday at the market sort of reawakens and and coming weeks or few months is clearly going to generate, you know, second half rather than the first half Revenue so that the m&a business on the capital advisory side it it's really just need I answer to the question just before you that the the first half you kind of hit an air pocket when people say wait a minute, I don't want to transact base on those net asset values that the private Equity Fund publishing wait for the March Thirty-One data that will come in May so I you know, my my guess is at least it will see quite a lot more of that in the in the second half and and restructuring is more of just kind of a, you know, a big cyclical girlfriend where you know, our quarterly kind of retainer fees that we collect were quite a lot higher in q1 than they weren't Q4. We expect they'll be quite a lot higher than that in Q2 and probably quite odd.

And then in Q4, so that's building on the the on the retainer side, but then you know, the completion fees will clearly start to for the for kind of some of the more recent transactions checking later this year as well. So it's hard to quantify all that of course, but just directionally, you know in each of the three there's there's a pretty good reason for thinking that the the the second half should look quite a lot of the first half of the revenue side.

Okay, if I could just shift gears get one more in here on the Capri she oh, you know, you know, it was elevated this quarter and then kind of gave some color on Thursday. I wanted to get a little bit more information there. So it ran at 81% this year and you know above last year's first quarter levels, I guess last year it looked like you were essentially across assuming kind of a you know Improvement throughout the year. How should we think about what the what the elevated copper a Sion top dollars and qualify for this first quarter off and I guess why not? Why run it so high in the first quarter if you expect it to come down throughout the years or some contractual reasons behind that and you know, giving kind of the challenging environment gives you confidence that you'll be able to really bring it down given the revenue environment. You know, it could be very challenging from here, you know. Yeah. Well, I mean just as a starting point the

It's high no question, but it was higher last year's first quarter. That was 88% This quarter obviously was 81% off. There's a lot of factors that go into into where compensation is, you know, the the amount of headcount you groaned the the people who you brought on any commitments, you've made a particular individual's choice, you know, your expectation of what you're going to need to pay to be competitive and kind of continue to develop the business so hard to give too much more color on that but look I would look back to last year as as a loss scenario certainly with scenario. We are aiming for you know, we ended the year with a very reasonable compensation ratio. I mean, I I said all year last year that that's where we were going to aim for and we're way to end up and and in fact we did at the end end up very very close to our you know, our Target annual compensation ratio. So we're going to try to do that again if dead.

You know and frankly.

To me, you know, a fair degree of confidence that we can always head in that direction is is what I just said about sort of first-half verse a second half revenues and you know again, it's not just one of the businesses that feels like all three should be in a significantly different position in the second half in the first and and that ought to give us a fair amount of flexibility to bring that ratio down exactly like wage last year.

Thank you. Appreciate that. Thank you.

And today's Final question comes from Richard Branson. I'll Goldman Sachs, please. Go ahead.

Hey, this is James filling in for Richard. Thanks for taking my questions. The first one is obviously you've seen a lot of strong growth and the restructuring business recently. Is there any way you could character exercise the business either today or perhaps before the coronavirus began to affect the environment just so we can sort of understand the durability of total revenue in particular in light of the decline in in m&a Revenue agent.

It it's it's probably hard to do that to be honest. I mean it look at it's it's going to be a long significant percentage of our total revenue in 2020, but I actually think it's going to be for the long term as well. You know, as I said, we we didn't know covid-19 was coming and all the money, you know terrible impact on Capital markets and so many companies revenue and the impact on their their balance sheets and so on but but we we were already expecting a you know, quite substantial percentage increase in wage structure in Revenue this year and that it would grow in 2020 to become, you know, quite a significant part of the overall firm clearly our our view of twenty-twenty Revenue and and further of 21 Revenue in that area is even greater. So I mean, I think we went let me put it this way if it's may be of some help a lot of the analysts will look at the various birth.

And sort of try to quantify sometimes. You know, how much of the revenue is m&a and how much is is non m&a in you know, other activities like like restructuring and I think historically thought we were on the end of the spectrum. That was very far over toward pure m&a it's not all we did. But certainly we were very heavily weighted toward that I think we have moved to the point where you know, certainly I would feel like we're in the middle of that pack and maybe even, you know, given the capital advisory acquisition we did as well as the restructuring maybe even moving toward, you know, the high end but in terms of how Diversified we are relative to a pure emanate business and you know, that's just directional obviously it's going to ebb and flow as times go to a gym, you know good times or bad and and clearly were in a. We're not for all companies by any means but certainly in some sectors. There's going to be a lot of you know challenges

Dealing with balance sheets given a reduced revenue. And so I think for the

You know for the next I would think really even two plus years. We're going to see restructuring be a really important part of our firm's total revenue just like you're going to see for some of our more Diversified.

Yeah, that's actually super helpful way of contextualizing it. Maybe you could talk about how your cat will return priorities have changed in light of the week or macro environment. And you know, if she has goes on for a more prolonged period of time are there any actions that you potentially consider to protect your cash balances? I don't I don't see the need for anything in particular mean. How do you had you posited for me the scenario that we're now in some months ago. You know, what do you think life will be like of all of your office is closed and you can't meet with clients and m&a activity plummets. And so on Monday, I mean, I probably would have had a pretty sober view of what the future might hold. But now that we're sort of, you know, six or eight weeks into that and I can see the flow of restructuring come in I can see that you know, m&a is not completely going away by any stretch. There are old things that slowed down a little bit better still there. A lot of new things that are developing. I I'm you know, frankly. I'm not I'm not overly concerned about

To continue to operate, you know, even if things stay difficult longer than than I think they will so we took the prudent step I think of saying all right, let's just put a pause on firmer repurchases given that there is undoubtedly a lot of uncertainty right now. We can always come back to that later if it's appropriate but but likely not for the you know for the very near-term and you know, let's do take a close look wage costs and things like that and certainly, you know, that's something we have done some over we will do more of and I think between that and sort of the Diversified Revenue stream, we've got you know, it certainly feels like we're we're both able to you know to get through this whole thing and the this kind of the switching from a share repurchase Focus to you know, a balance sheet strengthening focus is just, you know, one small step to to further bolster our our case in case things turn out to be, you know, more difficult to the one I'm expecting right now.

Understood and then I guess a related to that. You know how has the recruiting environment changed over the past few months and you know now that you know, you are seeing better activity and your end, you know, they you feel like a things are actually, you know stronger than you might have expected if I had you know this to you a few months ago, you know, are there opportunities to hire senior Bankers, you know wage. Is that something that you're you're looking into as well? Yes, we actually are, you know, we heard a couple of senior bankers and full-time type and then a couple of other senior advisors who are more part-time roles off in the first quarter. We we are actually in dialogue with some others. It's you know, a little different than normally we're talking bye-bye video and so on. I've actually use speaking to somebody else tomorrow morning. So New Jersey candidates continue to materialize and you know kind of old dialogues are you know in some cases getting rekindled so I don't think this is going to be a huge recruiting year, but I do think we've added some really important alibaug.

I think we're going to add some more important Talent certainly over the course of of the rest of the year.

I don't know question today comes from Dallas LPL Financial, please go ahead.

Hey guys, I like the I really like the strategy you guys have a focusing on the advisory. I had a question about just wondering how you guys are if you have specific goals on how much uh that reduction you want to get this this year.

You know, I I wouldn't I as much as possible is probably the short answer but I wouldn't I wouldn't want to try to quantify it. I mean it really it, you know our Focus this year is just on having, you know, a reasonably Good Year and a really tough environment and the way I look at it is, you know, if in the first half which obviously is very severely impacted by covid-19 if we can generate even in that tough six months enough Revenue to run our business and if we can position ourselves during that period to hopefully have a much stronger second-half after that then I'm going to consider it a victory in in WhatsApp probably the biggest, you know, financial and business crisis certainly at my career and you know, we'll see where we are at the end of the year and you know, obviously we have our seasonal needs they tend to ease the beginning of the year and and then decline over the course of that year and you know, we'll do what we can on on on for the paying down debt over time. But you know, the main focus is let's just let's just yep.

This business can perform even under some pretty extreme circumstances. And you know, we feel like the first several weeks of these extreme circumstances where we've been proving that.

Okay. Thanks guys. That's all I have. Okay. Thank you very much. Thanks everybody else for dialing and I think that's our last question and we look forward to speaking you all again soon.

Okay. Thanks a lot. All right. Thank you.