Q2 2020 Greenhill & Co Inc Earnings Call
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Thank you.
Good afternoon, and thank you all for joining us today for Greenhill second quarter 2020 financial results Conference call.
Patrick So it holds greenhills head of Investor Relations and joining me on the call today, It's got box, 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 or outside of the firm's control and are subject to known and unknown risks uncertainties assumptions.
The firm's actual results on financial condition may differ possibly materially from what is indicated in those forward looking statements.
A discussion of some of the risks and factors that could affect firms future results. Please see our filings with the Securities and Exchange Commission. Good in our annual report on form 10-K quarterly reports on form 10-Q.
Reports on form 8-K.
We are any other person assumes responsibility for the accuracy or completeness of any of these forward looking statements.
Rely upon forward looking statements as predictions of future events.
We're under no duty to update any of these forward looking statements after the date on which they're made.
I'd now like to turn the call over to Scott.
Thank you Patrick we reported second quarter revenue of $47.8 million spent a loss per share of 79 cents.
For the year to date, we had revenue of $114.9 million on a loss per share of $1.19.
Revenue for the year to date was 7% higher than our figure from last year. When we had a weak first half that was followed by a strong second now we came into this you're expecting the positive momentum from last year's second half to continue but the pandemic and resulting economic downturn put a pause on that.
Despite that pause based on the timing of various M&A in restructuring assignments, we expect to see sequential revenue improvement in the current quarter at a particularly strong fourth quarter, resulting in a respectable revenue outcome for the full year.
Before we go into more detail on our results and outlook I want to provide an update on our operations. Starting this pandemic period consistent with what I said her last call. We have continued to function or well operationally maintain close client relationships build new relationships and provide the same high quality advice, we've always offered.
While the majority of our people are still working remotely our global team remain connected engaged in a highly motivated with a remarkably high level of morale at all levels. Despite the many personal and business challenges created by the pandemic.
In recent weeks most of our offices around the world, including the New York Headquarters Ram right now have reopened and people started to return.
Regardless of how long it takes get everyone back on or off those we are well positioned to continue to serve clients in the interim as they navigate the complex challenges created by the pandemic in fact during the second quarter, we were able to win and execute certain restructuring and even M&A transactions for clients without ever having met them in person.
Now I will provide some more detail on our results and our outlook and the first half we saw a significant increase in revenue from our recently, a large and still growing restructuring advisory business.
We historically had a very small but high quality restructuring team until we decide to two years ago to embark on a major expansion. While it is difficult to provide quantitative data on this business given its close into relationship with the M&A business. It's fair to say that our dedicated restructuring team is now multiple times bigger than it was previously and our capacity as further expand that by the end ball.
Segment of numerous industry sector in the M&A caucus bankers.
Consistent with the growth from the team our restructuring related revenue for this year will likewise be multiple times greater than it was last year.
The restructuring retainer fees are all time high levels and that's completion fees. Following the second half we expect this business to be a very important contributor to our total revenue for this year.
To give you some granular sense of the pace of activity in progress on major assignments. We are seeing in the past three to four weeks Weve a buys on for significant pre arranged bankruptcy filings for Cirque Du Soleil per fast food restaurant owner and PC for Global Eagle Entertainment, which is reported in today's Wall Street Journal and for US Sina the owner of reach.
Keller and Taylor, which was reported earlier today and the Wall Street Journal.
We are debtor advisor, which is typically seen as the largest roll on all but a sina where we are representing creditors.
Beyond what we foresee this year, we expect this restructuring cycle to run for multiple years as the impacts of the pandemic propagated in a ball and already we have one assignments, where we expect completion will come next year rather than this one.
Offsetting the increase on restructuring revenue in the first half was the fact that industry wide M&A activity fell to the lowest levels of the of the financial crisis and the capital Advisory transaction volumes fell. Similarly, however, we are optimistic about improvement in both areas going forward M&A volume as a percentage of total stock market capitalization a measure.
Analysts and investors have historically used to monitor the M&A cycle is at the lowest level since that figure started getting measured in the 19 eighties. In addition in our from we've actually seen an increase in new assignment activity for M&A in the first half compared to last year. The challenge is simply that many transaction processes, either paused or are progressing slowly given.
Uncertainty created by the pandemic.
Likewise on the capital advisory side transaction volume as far below its level of last year with institutional investment portfolio managers continuing to grow their private equity allocations and specialized funds focused on the secondary private equity market also continuing to grow there's good reason looks back the secondary market capital Advisory AG.
Pivotable returned to pre pandemic levels and grow from there once visibility as to the virus and the economy improves to some extent.
By region, the U.S. will be a major contributor to our full year results given that is where the bulk of our restructuring activity is located.
Europe has a much smaller restructuring opportunities on the U.S., but made a major contribution to our first half revenue and shut for the full year based on increased M&A activity there.
Australia, Canada, and Japan, we're seeing reasonable levels of activity and we expect respectable contributions to our full year.
As noted in our earnings release during the third quarter, we exited Brazil by selling our business there to the local team for a nominal some we had a good group of bankers on Brazil, but we did not find the kind of larger cross border opportunities. We found in other markets as a result, particularly given the weakness of the Brazilian currency, we generated modest dollar revenue improved.
Unable to generate a return on our investment in that market.
Accordingly, we expect this move to be modestly accretive to our productivity and profitability statistics going forward.
The update on Brazil to good segue to speaking about expenses, we are taking a number of steps to reduce our operating costs, where possible while continuing to invest in the long term potential of our business with respect to personnel. We expect to end. This year was about the same headcount we started the year, but within that number there will be some reallocating of headcount to areas, we believe have greater potential.
Example, continuing to build up our restructuring team in certain sector focus teams, while exiting Brazil, and losing the dozen or so employees we had there.
Our compensation cost for the first half were up about 10% compared to last year, given some headcount growth we had since the prior period and our compensation ratio was elevated by the low level of revenue as we did last year, we like to bring that ratio down considerably by year end.
Our non compensation cost for the first half were meaningfully lower than the last years level. Despite some nonrecurring costs related to our exit from Brazil and to our expensing rent on two New York offices, while we build out new space that we will move into later this year for next year and beyond our rental costs in New York will be lower than recent level. So this brief overlapping costs as a good.
Our investment.
And other costs. Our interest expense has continued to decline versus last year. As a result of last year's refinancing and the recent declines and interest rates and our tax rate is not terribly meaningful given the unusual first half loss.
As noted in our press release based on our outlook for both revenue and expenses and the second half our objective and expectation as to generate a net profit for the full year.
In terms of capital return and liquidity, we declared our usual quarterly dividend, but we've continued to pause on share repurchases that we implemented when the pandemic began we ended the quarter with $84.6 million of cash and have only 3.1 million and remaining principal repayment schedule. This year, given our expectation of a strong finish to the year, we aim to be.
Making incremental debt paydowns by early next year now I'm happy to take any questions.
Thank you we will now begin my question and answer session.
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Your first question comes from Devin Ryan from JMP Securities. Please go ahead.
Hey, Scott how are you.
Good are you Devon.
I'm doing well I'm.
Appreciate the commentary on.
The outlook and I guess, the next several quarters of supply the flood into I'm, just curious as you're thinking about the fourth quarter, obviously still a little ways away because the expectation.
Pretty strong result is that based on.
You activity, that's already been announced and so yes in pretty good visibility into decline may completions, and how much of that kind of expectation is activity that hopefully will come together, but.
Maybe is less certainty because a deal has actually been adopt.
I would say a very high portion of that is kind of announced in one way or another or at least signed if it's not publicly announced.
So you know, they're very small or things that we expect will still both got signed and completed this year, but obviously we're already in July so there's not a huge amount of that so I'd say, we have pretty good visibility as we often do for sort of four five months out.
Obviously, it's always foggy or when you get to a year out but for us for this kind of timeframe you can look at what's already well underway and and and have a pretty good view, usually as to when things will close.
Got it okay. Thanks.
And then in terms of just the M&A markets more broadly and the outlook there yeah, we're kind of in this.
Unique moment, where there's just no extreme uncertainty and whether the virus.
Creates another shut down and sectors.
Okay can shorten their and the other India Europe feels maybe slightly better in terms of their positioning I get the virus. I'm curious are you seeing kind of M&A activity tracking kinda reopening meeting is Europe.
Maybe coming together faster really going to you asked just because there's maybe the ability to meet more person or.
How are you thinking about.
I guess the markets from geography, and then how important is obviously the reopening to capability that we strike the M&A edge.
Yep.
Look I I don't I don't see a lot of difference across the regions I do feel like.
That activity and sort of momentum in the M&A market has ticked up in recent weeks.
I don't think people are going to be meeting face to face with the clients very often for probably a good while yet so I don't think that's a factor Europe versus the last I think in other still going to be probably pretty minimal face to face meetings and more by phone and email and all the rest.
So I have I feel like I've seen some some uptick in activity in recent weeks I mean, what but what I really a banking or more than anything is that you know I can't predict how long the sort of the unusual period, we're living through from a health perspective is going to last but but I do know that literally the only time in my career.
Okay, and M&A volume was as weak as it is right now it's really 2009 that was by far the worst year. The financial crisis. The next year. There was a 50% increase that M&A activity in that state at least at that level for the next 10 years.
Can go back to like literally the year I joined US from 1997 of the statistics were quite similar to what they are on track for this year and think how many fewer firms or even in this business back in 1997. So I think there are some.
Just a tremendous kind of pent up.
Demand that one normally sees one there is a big shutdown like there wasnt 2009 or like there is an.
And that other statistic I alluded to in my talk about M&A as a percent of total stock market cap I mean that literally as ranged from all the way back to the 19 eighties from between five and 15%, sometimes a little bit higher.
First set of total market cabinets below three right now I mean, it's never been below five so I I think whenever whenever things do kind of get back to normal and I think they're starting now.
I think that we're going to go back to you know what's been the norm for the last decades for M&A activity.
Yep.
Appreciate that.
It does stats as well I guess the last question on the restructuring business, you're benefiting from growing your overall franchise as you've added a number heads as you mentioned, but also just did a pretty substantial uptick in industry activity.
What do you think about kind of the momentum this year in terms of impact on revenues you have.
Good nice step up this year from last year, but just given the nature of the deals and the likes of absolute announcement or start to completion. It would seem that there's there's quite a bit that's been announced recently that could be more 2021 revenue evacuated the expectation at this point that 2021 could see kind of another.
Function higher in revenue just based on your views of the market after restructuring remaining active for few years.
Yes, I mean, I actually I'm quite optimistic about what the even in a falling 2020, just based on the status of various things that are pending out there, but but I think we know wherever we end up I would expect 2021 for you know for us and probably for the whole advisor industry.
To be as good if not better than 2020 in terms of.
Restructuring revenue for just the reason your point out these things do have a long time frame, usually but I won't say always I mean, sometimes you can quickly got to kind of a pre range deal everybody's agreed and yes, you've got to still put it through court, but things can move pretty quickly there.
But but.
A lot of deals of course do have longer tail to them and so I think 2021, and frankly, probably 2022 I mean as this is going to you know there's going to be a a real.
Kind of.
Bifurcated impact on the economy, there many industries of course, almost completely unscathed, maybe even better off as a result of the crisis and there are others like retailing in energy and some aspects of industrials that are trying you know anything you'd have a transportation leisure et cetera.
That.
Companies are really been hammered by this and they're not all in bankruptcy, yet, but but there will come a time as maturities come closer that more and more going to needs to do some kind of restructuring in or out of court.
Yes, okay.
Okay I'll leave it there thanks guys appreciate it alright. Thank you.
Thank you. Your next question comes from Michael Brown from KBW. Please go ahead.
Yeah, Hi, Scott good evening.
Hello.
Your fourth quarter earnings call I'm, one of the I think is important. It's your was constrained in the Brazilian franchise noted that they had their best year ever in 2019. So.
Here, but you're kind of saying about the.
The reason, so but I wanted to just learned more about a little more about that it's just that the environment has shifted so significantly since then you're right warrants opportunity.
Yeah, so that that franchise to be profitable going forward, just seems like a major shifts and I'd rather short period. So just wanted to hear more about that.
Well, we've really we really had one good year out of the seven that we were there and financial sense and that was last year was reasonably good again not material to the firm at all but at least that had good momentum I mean as you as you know if you followed at all in Brazil has had a series of sort of political and economic crises and.
And so notwithstanding as I said, a very high quality team, we really struggled to to make much money down there make really any on a longer term basis.
And with the vibrant downside to the virus I think the potential to continue that momentum into this year I think the you know any any hopes about sort of pretty quickly went away I think in out life might have been quite different had the virus not hit but whatever impact we're feeling in places like New York and London, it's going to be a multiple of that down there.
So.
So we.
Our think that what we're doing is absolutely the right. The right thing in terms of the productivity and profitability of our firm but.
And won't certainly have any kind of material impact on revenue, but also I think it's good for the team to be.
Independent and let them have there's kind of domestically oriented business down there and we wish them all best.
Okay got it.
And just wanted to go back to your comment earlier so.
No it looks like.
Year to date, we've lost 22.
And it sounds like you are expecting or your goal is to turn a profit for the full year.
That would be really well above what the consensus estimates are predicted.
Given what we're seeing kind of the industry announcement trends at that does seem like it pretty cross sale decline.
So could you just help us understand that a little bit better.
You mentioned thats kind of revenue and expenses, both contributing there give us a little bit more color what really key revenue drivers is it that.
You are seeing a pickup in kind of retail restructuring environment that seems to be a little bit.
Maybe quicker closing times, so that restructuring come through a little bit sooner.
Or is that.
You are going to be able to pull down on the comp costs, a little bit more in the second half for non comp a little bit more so.
Just a little bit a commentary there would be helpful for us to kind of square that were down what the expectations are out there.
Sure.
First obviously, we're gonna do what's prudent expenses, but really I'm talking about revenue as being the driver to get to where we think we're going be gad for.
For this year and notwithstanding that the fairly dreadful market wide statistics on M&A, you know were worth the size from where it all just depends entirely on our individual pipeline I mean, and so I'm looking at specific.
M&A transaction specific restructuring transactions, what the progress to those is which ones. We think we'll close on a probability weighted basis.
That gets us to.
An outlook that yes, I will agree with you as quite different from what the consensus is.
I think probably two was significant degree people have still lot appreciated how how large are restructuring business has become and frankly, the probably missing some degree some of the potential we've got in the pipeline from M&A as well, but.
Probably the biggest factor is I think people havent quite taken onboard that we for the first time are significant player and restructuring.
Great Great and then just just one one more here.
Any any outlook or commentary on your expectations for the cogent business as we think about the second half year.
I would say in my in my outlook for the firm for the year I'm not building in some huge bounce back in the second half for for that group, but I do think that either late this year early next year.
There will be significant pickup there I mean, that's been a remarkably steady business over the years, but whenever you have a real dislocation.
Like we did in the first quarter you can naturally see why investors think while I want to see the first quarter marks before I transact and then of course by time. Those came out you had this huge rebound. So I think its natural for investors say I want to see the second quarter marks before I consider transacting. So I think sometime later this year certainly next year I would expect that business too.
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It's a rebound more toward its historic norms, but that's but I'm not kind of relying on that in terms of of the outlook that I've described today.
Thanks, Dan.
Thank you Scott.
Okay. Thank you.
Thank you once again, if you wish to ask a question. Please press Star then one on your telephone.
To be announced your next question comes from Richard Branson from Goldman Sachs. Please go ahead.
Hey, Scott, it's James your I'm filling in for furniture Ramsden. Thanks, a lot for taking the time.
The first one for me is just if you could maybe talk about the geographic skew of the deals you're seeing across the M&A business and perhaps also the sort of size skew of those deals just trying to get a sense of what part of the business is improving for you. If you can comment on that one.
Now I think it's probably probably Europe is maybe the biggest positive surprise. This year, obviously, they've been hit by the pandemic as well so had thats had a negative impact, but but we've seen.
We've seen a pretty good level of activity, there and I think even increasing in recent weeks. So I think whereas last year was a year or when our European revenue. It was very soft now that was on the heels of an extraordinary year. They had the year before you know as we had hoped and expect that I think this year, we'll see.
Very substantial rebound in European contribution in the U.S. It just depends on awful lot by sector, a sector is way more important than geography and.
If it's if its consumer if its health care up with industrial.
Financial services of some kind of things are quite.
Healthy if its energy if its retailing and some other sectors that that's much more of a restructuring business right now so that's kind of how we see the different sources of revenue.
Makes sense, maybe we can do they take a little bit deeper into the European business. So obviously that's a.
Jurisdiction that didnt really participate in the pickup in M&A over the last cycle. So I guess, how would you think about the ability for activity there to recover to levels seen maybe two cycles. It go and is there some sort of pent up demand because of the lack of pickup in activity there over the last decade.
Well look certainly that's my hope and it's always on my expectation that at some point, we would have got back there you're absolutely right, but if you go back a pre financial crisis. The European M&A market was essentially the same size of the American M&A market and for the last 10 years, Europe would need to be sort of 50%.
Bigger just been around terms to get to the U.S. level. So it never really recovered from the financial crisis like like US activity did and I think they're good reasons for that obviously Europe was less aggressive and sort of combating the impact of the financial crisis less aggressive about you know re equitize.
In the financial institutions and things like that.
I think the just when you thought maybe we might be getting back to normal you had the surprise Brexit vote, then that took sort of three years to sort of sort out what that exactly meant I realize theres still uncertainty there to some degree.
So I think it was a little bit for M&A in Europe I mean.
It was like there was no success, but it was compared to the decade before it was very anemic and I think now with.
In our Brexit pretty much resolved with the UK having.
Pretty strong conservative pro business government in place.
In the UK is of course at a very important piece of the European M&A market historically.
I'm hopeful that Europe will come back to its historic place of being closer to the U.S. market in terms of.
Deal of market size for mergers.
Okay that makes sense and then last one is more of a modeling one just trying to get a sense of what the minimum level of quarterly comp expense that we should be expecting going forward. So I guess sort of asking what the the the fixed comp expense is in the business right now Im just trying to.
To figure out.
You know how to get to your commentary around positive profitability for the full year.
I think if you look at what we booked this quarter I think that probably it's not all fixed but on the other hand, there there are some levels at which bonuses or quantify fixed as well.
So I think that what we've done this quarter is probably a reasonable estimate of what.
Kind of the low end of one can accrue and still be competitive and so on.
On an annualized basis.
All right that's super helpful. Thanks, a lot.
Okay. Thank you.
Thank you. Your next question comes from Jeff from Piper Jaffray. Please go ahead.
Good afternoon Scott.
Oh.
Couple of more from me when we look at a more constructive revenue outlook for the second half of this year, how important are restructuring revenues in that outlook relative to other parts of your business.
If it's certainly very important I mean, as I said, we've we've grown this business a lot and even coming into this year pre pandemic. It was going to be a much more significant contributor than it has been for us historically, obviously that pandemic really speed of the along.
I would now we've got retainers at much higher levels. When we've got a pipeline of completion fees that will fall at various points.
Going forward. So yes, that's the best the I mean again, it's hard to quantify for the reason I mentioned in my.
Script, but.
But it's going to be certainly significant.
And then I'm assuming it's.
That's the restructuring is kind of where we have the least visibility I would assume that assumes some transaction closings as well.
Yeah, and that's exactly and that's why I tried to give a little bit of granular detail. It's hard to you know it's hard to took for kind of quantify in a number of we don't want to get into sort of segment reporting or something like that it doesn't make sense given the overlaps with the various businesses but.
But yes. It does not not every restructuring is going to take a year to close this is an environment, where I think.
As much as ever aware of parties should want to have a quick resolution and.
I will get get back out with the restructure balance sheet. So I think theres, probably the prospect that up some reasonable number of things move more quickly.
Okay and on.
We've been hearing a lot and it sounds like you're saying it too that the level of conversations or the M&A business is actually still pretty strong are pretty good how important are face to face meetings and face to face for like due diligence for actually getting transactions announced I mean, how much do we have to have transportation kind of wide open again before it can really see a pickup in an.
Now instruments going forward.
You know we've seen cases, I mean literally have done M&A deals without people, even meeting, which is which same seems really extraordinary but but it is true and people are getting creative.
And where they need to have meetings, maybe have smaller meetings with all the right kind of health protocols and things like that so I don't think you at all need to have the airlines restore service everywhere and.
People like me be spending three days a week in an airport for the M&A business to come back I think every company has adapted to a virtual world now obviously, there's some kinds of situations you're going to need to sort of see.
See a plant or something but most as you well know most most kind of due diligence information is an data for.
It might be might be a lot of numbers about historical.
Our projected results that might be patents that might be trademarks that might be copyright that might be a formula as it can be all kinds of.
Different things and frankly, you can do an awful lot of it not together there was a day back when I was a lawyer million years ago.
Contracts rise negotiated face to face big Big team lawyers on each side of along table and you've kind of hash. It out now many many M&A deals happen to Levelers even meeting.
They just zing, the drafts back and forth and so I think M&A is kind of taken a step in that direction, that's not to say that it won't.
For a lot of important deals require people getting back together again, but.
You should just keep in mind that there are a lot of companies out there that we already know their target.
They've had talks over the years, they know the management team et cetera, and that kind of lowers the bar a little bit in terms of how much face to face they need.
Okay, and then as we're thinking about noncomp, it kind of where that that kind of ahead. So I mean is that is something closer to kind of $15 million quarterly run rate a decent way to think about things on the back half of your because there were some so kind of nonrecurring items and this quarter.
Yes, I think thats, a reasonable way to look at it.
Okay. Thank you.
Okay. Thanks, very much I think thats, our last question. So I, thank everybody for listening in and.
Stay healthy and we'll talk again next quarter.
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