Q3 2020 Greenhill & Co Inc Earnings Call

Good afternoon, everyone and welcome to the Greenhill third quarter, a 2020 earnings call.

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At this time I'd like telecom, it's called over to you Patrick sales.

<unk> of Investor Relations Sir Please go ahead.

Thank you.

Good afternoon, and thank you all for joining us today for Greenhills third quarter 2020 financial results Conference call.

Patrick So it helps greenhills head of Investor Relations joining me on the call today, Scott Bok, our chairman and Chief Executive Officer.

Today's call May include forward looking statements.

These statements are based on our current expectations regarding future events that by their nature are outside of the firm's control and are subject to known and unknown risks uncertainties and assumptions.

The firm's actual results and financial condition may differ possibly materially from what is indicated in those forward looking statements.

For discussion of some of the risks and factors that could affect the firm's future results. Please see our filings with the Securities and Exchange Commission, including our annual report on form 10-K.

Quarterly reports on form 10-Q, and current reports on form 8-K.

Neither we nor any other person assumes responsibility for the accuracy completeness of any of these forward looking statements.

You should not rely upon forward looking statements as predictions of future events. We are under no duty to update any of these forward looking statements. After the date on which they are made.

I would now like to turn the call over to Scott.

Thank you Patrick we reported third quarter revenue of $56 million and a loss per share of 49 cents for the year to date, we had revenue of $170.9 million and a loss per share of $1.69.

Revenue for the year to date was down 12% compared to last year in short for the year to date significantly increased restructuring revenue has not been sufficient to overcome significant declines in M&A and capital advisory revenue.

However, consistent with our comments last quarter based on the expected timing of various M&A and restructuring projects, we expect a particularly strong fourth quarter, resulting in a respectable revenue outcome at a net profit for the full year.

Before I go into more detail on our results and outlook I will provide you a brief update on our operations during the pandemic.

In summary, we have continued to function well operationally maintain close client relationships build new relationships and provide the same high quality advice. We have always offered many of our offices are reopened to some degree, but regardless of how long it takes to get everyone back in the offices. We are fully prepared to continue for as long as necessary in a hybrid work model as we advised.

As clients on addressing challenges and pursuing opportunities created by the pandemic.

Now I will provide a bit more detail on our results and outlook as noted on recent quarterly calls we saw a big increase in restructuring activity as a pandemic took hold and we were well positioned to take advantage of that given the significant well time to expansion of our restructuring team over the two years prior to that.

Based on our expectation regarding various restructuring completions, we expect that by the time our full year results are recorded it will be clear that restructuring is now a major contributor to our firm's revenue and provides a valuable hedge against periods of economic weakness and reduced M&A activity.

Given continuing financial distress in many industries, we expect restructuring to continue to be a major revenue contributor for at least 2021 and likely beyond.

While the decline in M&A activity in the early part of the pandemic more than offset the benefits from increased restructuring activity. The third quarter saw a sharp increase in M&A activity, particularly in the many sectors that have not been adversely affected by the pandemic.

We therefore expect M&A to be a solid contributor to our full year results alongside restructuring. Furthermore, based on the pace of new assignments that are affirming the fact that overall M&A activity. This year as far below historic levels, particularly relative to total stock market Capitalizations, we expect the increased level of M&A activity to continue. This is obviously important for US is M&A continues to be.

By far the largest part of our firm.

By region, the U.S. will be a major contributor to full year results given that it is where the bulk of our restructuring activity is located.

As opposed to smaller restructuring opportunity than the U.S., but will be a major contributor to M&A revenue deal activity in Europe has been depressed relative to the U.S. for several years, but we are hopeful that what we're seeing is the beginning of a strong rebound other regions will likely make a reduced contribution this year, but we are seeing signs of a M&A rebound across all markets.

Turning to expenses, our compensation ratio for the year to date, a significantly higher than normal, but we expect to bring that down by year end as a result of higher revenue or.

Our non compensation costs, a materially lower for the year to date and we expect that to continue until the pandemic is behind US. Even then we expect to see some expense savings relative to historic levels.

And other costs our expense interest expense has continued to decline as a result of last year's refinancing and recent declines in interest rates as well as from some reduction in debt levels.

Our tax rate is not meaningful for the year to date, given a loss, but we expect for the full year that it will be at or slightly below the mid 20% range. We have indicated for the last few years.

I will close with a few comments summing up our strategy.

With respect to revenue, we aim to increase productivity by managing our senior banker and supporting professional headcount such that we have more resources in high fee areas like M&A and restructuring and the most important markets and less resources and lower fee areas. We've had some personnel departures that will help with the latter part of that equation and we have a robust recruiting pipeline that will help on the former part of.

That equation with respect to cost we've taken the opportunity to reduce costs, where appropriate impossible and we'll continue to do so one example is that the rent cost of our New York headquarters will be materially lower starting next year plus of course, our interest expense will continue to decline as we pay down debt.

With respect to capital management, our primary focus is on accelerating <unk> debt repayment and if this year and as we expect we will make progress in this regard early in the new year alongside accelerated debt repayment. We also expect to resume prudent share repurchases early in the new year in part by means of tax withholding on the vesting of restricted stock our team collectively owns about half the.

Economics of our firm through stock and restricted stock as a result, we have a powerful incentive to implement the foregoing strategy such that we substantially enhance long term shareholder value for the benefit of external and internal shareholders with that I'm happy to take any questions.

[noise], ladies and gentlemen at this time well begin the question and answer session to ask a question you May Press Star and then one using a touchtone telephone.

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And our first question today comes from Devin Ryan from JMP Securities. Please go ahead with your question.

[noise], great. That's got I, Patrick how are you guys.

Doing well I guess first question on it the commentary around the fourth quarter. It sounds like I should be you know obviously quite a strong revenue quarter is the implication and drilling to you know the restructuring piece.

Is it fair to think that the fourth quarter is really the first quarter, where you know the pandemic.

Restructuring activity is going to be hitting and is that type me. It was a fourth quarter common aberrational quarter for restructuring or as you look into 2021 are those the types of quarters that we should expect just based on how the backlog had built I don't know if you can give any more flavor for that but well I'm trying to think about kind of the step for.

Action in the potential restructure a relative to what its been contributing you know through the first three quarters of this year. Okay. Good. Good question I'll try to help a little bit on that although it's of course, it's always hard to quantify too much or forecast too much of course.

Look we came into this year with a certainly a smaller restructuring pipeline than most of our peer firms would have a would've had most of our peer firms had much much bigger groups. We were just in the process of ramping up starting in 2018 very heavily through 2019, you know building up a team building up a.

Backlog and so what we're going to see in terms of restructuring contribution.

This year is going to you know very heavily fall in the fourth quarter and it's going to be very heavily stuff that the opportunities that developed in the early days of the pandemic.

So I do think you know of course those opportunities are going to stretch out I mean, clearly with what's going on with the virus and further economic locked down since you know slow return to things like travel and and areas like that I mean, clearly, there's there's going to be a prolonged impact of that pandemic and.

I think the the <unk>.

Kind of the message I'd like to convey in response to your question is that you know we we just have a kind of a newly expanded team as I've really kind of right around just the time. This pandemic real it really hit a and so we didnt have as big a backlog probably as most of our peers as it appears that coming into the pandemic and so.

If you think about how long it takes even for a pretty fast paced restructuring to get to the completion line I mean, a lot of those things we those opportunities. We won in the early days of the pandemic you know many of them a you know a little bit of closure in Q3, a lot more in Q4, certainly significant amounts will roll over into next year and that I think very importantly going for.

Forward. We now have you now for over a year now in place a significantly expanded teams. So I think you know for us that the kind of the run rate. If you will of restructuring you know that there really should be a step function change from where it was say certainly two years ago, even a year ago, and and you'll start to see the real benefit of that.

I think in the next quarter or two.

Okay terrific. Yeah, I was just really getting it just to make sure that the fourth quarter wasn't exhausting yeah. The current backlog, which it doesn't sound like it is okay. Great and then just a second question around just headcount senior banker headcount, obviously uptick a little bit of a step back here you mentioned kind of shift.

Stinks, where where you're focusing I guess, where have you pulled back a bit and then if you look at the pipeline today, where you are you going to be leaning in so if you think about 2021, where are the opportunities and.

When we look at the compensation line is there any additional competition in there just tied to head count reductions and maybe it's.

Its a bit higher I'm, just trying to think about the nuance for accomplish I know, there's not too much to read into it because of the revenue quarter, but just trying to kind of think through some other stuff that.

Yeah look I think we you know for example, we're well we're pulling back from areas of of M&A, where we think there's just not nearly the fee opportunity certainly Brazil was a great example of that I mean, we were there for a number of years made between what happened with that that currency, they're getting crushed and you know valuations of assets getting crushed.

You know there just isn't the opportunity to earn fees that are going to get into the kind of productivity level that you want. So that's one example, you know in capital Advisory, where we're definitely going through a you know a bit of an evolution. We've been in that business for several years, where you know really kind of an unchanged focus in Europe and in Asia, which is probably the fastest growing part of that.

Business you know in the U.S. I think we'd we'd probably it ended up with two big a concert top heavy concentration of resources. When you know you probably would ideally have the team B you know maybe very similar size, but at a somewhat different shape to go after that business and I think also too yes.

All the way that business, what that business pursues away from the you know the sort of the standards a secondary transactions, where you know in a dominant <unk> pension fund is selling a block of private equity interest to a secondary fund to doing more complex you know general partner restructuring type transaction.

Transactions, where you're working with private equity funds to meet their objectives and so I think there are some you know evolution. Both in terms of the shape of the Org chart and in terms of what business you're going after there to again, you know ramp up the productivity to the level, we want it to be out.

Okay terrific I will I'll leave it there and hop back in the queue what someone else asked thanks, Scott good yeah.

Our next question comes from Jeff Harte from Piper Sandler. Please go ahead with your question.

Hey, good afternoon, guys, Hey, Jeff.

A couple from me when we look at at least the visible closings are things, we can see for for the third quarter. It appears especially from some of the whats website stuff that there were a number of closings kind of the last couple of days and maybe even into the first day of the fourth quarter did that have any impact as far as revenues being kind of pushed forward into next.

This quarter kind of pulled back into this quarter.

I don't think there was I mean, there's nothing actually that springs to mind, if any materiality. So you know I think there are you know there are probably where some things we thought we'd get done in the third quarter that and are you know are ending up in the fourth quarter, but but directionally I think what what I've said today is very consistent with what I said last quarter, which was we thought.

Third quarter be better, but but the real you know a strong quarter that would get us to the result, we won for the full year would be that really you know a very heavy fourth quarter and that's that continues to be the case. So yes, some things moved around a little bit, but certainly it's certainly not material pull forward of revenue if anything you know something so.

That we thought might get done in the third quarter and that have slipped into the fourth.

Okay, and you mentioned, a you don't have any conversations or at least kind of things you appearing to be coming back pretty pretty strongly we we've heard that from others as well I guess historically I'm used to thinking of you guys as being more on kind of large deals and that implies kind of cross border deals. So I mean are you kind of seeing the pickup.

In your traditional areas of strength as well as kind of seems that the pandemic that maybe cross border spent but kind of sluggish.

I would say, yes, what we're seeing I mean were by feel like we're seeing in it and I know others have said very similarly, you know a real kind of across the board pickup in and you know M&A dialogs and and that involves a lot of public companies that involve certainly a lot of private equity as well.

And it does actually involve larger transactions and cross border transactions I know that sort of seems like you know a difficult thing to do in an era, where it's not so easy physically to cross the border to do due diligence or meet management or have a contract negotiation, but you know people are finding a way to get it get it done or at least the Guy you know offers rolling so I think.

You know at least from the indications we see right now I actually think 2021 could end up being really a very busy year of M&A not just for our firm, but I think the whole all market, but I think we'll put you know ought to we should be well positioned to participate fully in that and and.

And to see that you know kind of manifest itself and in the way. It typically has for US which is public company deals and larger deals with a heavy component of cross border.

Okay and are looking to comp expense it seems like it kind of touches down around 46 47 million in recent quarters.

Is there any kind of a dollar for we should think of and I guess I'm trying to get my mind around.

So you know revenue is good quite a bit better next year, how much comp kind of flexibility could could there be as far as driving those revenue is down to the bottom line.

Look I think there's a yeah than that.

We looked at the first three quarters is kind of an I'd I'd you know misleading one really to look at the comp ratio I think when when you when we get to the end of the year, you'll say, okay. At least I think you'll say okay. This was a pandemic impacted year clearly that had an impact on you know on revenue the <unk> from came into the year 2020 with <unk>.

Very positive outlook and you know covered came along and sort of you know created a bit of an air pocket in push some things back, but you know I think we'll get two way what you'll see what you'll think as a kind of a reasonable place for a comp ratio for the year and then I think you know next year and beyond you know it it should be returning back to kind of a more.

Normal sort of level and you know and that implies a lot of comp lever. It a lot of a lot of operating leverage in the sense that you know just going from a very elevated comp ratio back to a normal comp ratio means you know really dramatic impact of higher revenue, which we again are kind of expecting to see in the fourth quarter and certainly hopeful to see next year as well.

Okay. Thank you okay. Thanks, a lot Jeff.

[noise]. Our next question comes from Michael Brown from KBW. Please go with your question.

Great. Thank you for taking my questions.

Hey, Scott I wanted to ask about the Kathy.

Capital Advisory business so.

So you touched on that a little bit in your on in Q now already but I wanted to ask about some of the I guess financial implications of those departures. So one from a revenue perspective.

As you know one of your on a investor presentations in that business contributed about 50 million of revenues in 2017, 18, and 19. So I guess, one where do we were can you kind of offset that revenue headwinds it sounds like it's going to be the restructuring business next year, but just interested to hear.

How you'll kind of overcome that that headwind I'm too is there any deferred comp benefit that we should see or cadence contemplate in our fourth quarter.

Numbers, and you're kind of Clawback component there and then Threeq can you just give us a view into the margin for that business. It sounds like you mentioned it was somewhat top heavy perhaps it wasnt.

Oh that officials or the other business, but just some color there would be interesting as well.

Sure.

I can't to put it in perspective, I would say that business as a whole for the time, we own debt and we bought it of course is a fully functioning you know already fairly old business. So it was up to a normal run rate. It averaged right I just kind of at or just under $10 million a year a month I'm, sorry, a quarter 10 million a quarter $40 million a year the fee.

51, I'm not sure if your numbers are quite right for the last few we did have some higher and had some lower this year much slower just because the pandemic impacted that business. So heavily but you know I would think of that historically as a $40 million.

Your revenue business I would say you know it was somewhat top heavy at all so it was a little more you know more sort of regulatory costs and things like that is little bit different than a than our other advisory businesses. So I think if you thought of that as maybe a 20% margin business I eat you know a couple of million dollars of pre tax income Uh huh.

For quarter and again, what happened with some people, leaving it really hasn't impacted us in the year in Europe has an impact as in Asia. So you know what you're talking about we lost people who contributed some portion of $2 million a quarter in pretax income so certainly not the end of the world.

I as I said I do think we overtime evolve to having frankly too many people at the at the senior and and and sometimes that's not the best way to you know to maximize revenue relative to more of a kind of a normal shape or chart, where you've got more supporting.

People, helping to drive the business so we.

Will evolve.

Evolve that business in a few ways I think trying to make it more efficient than it has been it's a very natural by the way. After you know after an acquisition that once you get through the whole you know contractually committed period, an earn out period that you end up doing some restructuring and I you know my goal as we got through that is to end up with a little.

More efficient team a little less top heavy team and the team also that is focused more on on sort of the the more complex and of the transaction spectrum as opposed to you know almost entirely on US you know kind of more straightforward secondary transactions.

So I don't know how much you know I don't expect you know all that much of an impact based on where the business is today in terms of income.

Income and you know as I said, we will rebuild and restructure there as necessary and at the same time kind of unrelated really you know we have a pretty robust pipeline of you know M&A candidates and what I think of as the best highest fee markets.

That will be looking to add in coming months as well.

And just just hard was there is there any deferred comp Oh, yeah, Yeah, and then there will be yes, and yes, and they're all of course, there always is some of that when when people leave so yeah that will be one of the things that got thrown into the mix in the fourth quarter not something.

Necessarily it was expected, but it is that's why there's just so little impact I think in terms of you know.

Near term you know earnings is that you know you do get the benefit of a of some claw back and.

You know between increase revenue and that you know that all gets thrown in the mix in terms of where I think comp ratio ends up for the year and I've commented on that already.

Got it thank you and then on to.

To switch gears on on Europe, you mentioned that as I'm kind of in an area. That's on that pretty favorable in your prepared remarks, and we've certainly seen that there the M&A market recovered there a little bit earlier, then then U.S. and its been and then pretty active.

How are you thinking about the activity you know recently I guess in have you seen any impact in the last couple of weeks from the Lockdowns there.

In certain markets or is it just that everyone understands that this is going to come up and they learn how to kind of work you know virtually and get deals done and you know this is just a you know operating environment that everyone's adapted to and it's not going to be a major headwind or have you seen a little bit of a pause at all.

You know my belief as we sit here today and how you know interacting very regularly of course my my European colleagues is that I I don't think we're going to get a further set back like we obviously did in the spring time I think the the sort of the the severity of the lock down a that we had in the spring which is clear.

Surely created a pause everywhere.

I think the lockdowns by governments or are.

Likely to be either more limited well more limited neither in either duration or in terms of extent and on top of that I think you know private equity funds public companies et cetera have all learned better how you do transactions and this kind of constrained environment. So I do think.

That you know, we certainly have seen a very pleasing pickup and European M&A activity and you know I I don't think the recent news is gonna set that back too badly some somebody because I think you know governments have realized that they there's just a limit to how long they can shut down or high tightly they can shut down without doing it.

Irreparable damage to economy. So so I think there's a bit of a rebound we started to see I'm pretty hopeful we'll we'll continue to see play out.

Okay, Great and just one more for me I'm on the hiring side as.

Right.

<unk> business here, where what what areas are you just kind of talk on targeting could you just don't want a finer point on on on where you're seeing the best growth opportunities and then too.

HM.

Where where are you kind of just where do you see the best opportunity to bring in talent externally and it is in the fourth quarter typically when that that happens or is that typically more like a first or second quarter event next year. When you have the most success hiring externally.

I think the industry has evolved to the point, where it tends to be a bit of a year round task to recruit that it used to be that you know people got pay their bonuses in January and February and they move jobs and you know February March and April.

I think it's become a little more evenly distributed throughout the year I mean, obviously this you're right. The pandemic set things back where people really couldn't you know kind of get face to face and meet new candidates or you don't have them meet and even if I know you know some of you to meet the rest of your team and so on so so I I think it's a little bit spread out, but you know this year I would price.

Well, we think.

And maybe most years, there's probably more recruiting sort of late first quarter or at least recruiting that you see you know that it becomes public.

You know maybe late first quarter and second quarter once people have sort of unpaid their bonuses and our thinking of moving somewhere else. So I think that's probably in terms of timing and where I see the most BRAF. The most interesting and maybe what where we have interest is what's driving what we're seeing is the the parts of M&A.

That are the most favorably impacted by the pandemic and that's you know things like consumer or some part the media some parts of health care or some parts of you know telecom and tech infrastructure and things like that so and of course those are areas that are you know I've ever had the benefit of favorable growth going even well before the pen.

That make but its just been accelerated by the pandemic. So that's kind of where I think we have the most interest and see the most opportunity right now.

Okay, Yeah that makes sense. Thanks for taking my questions got okay. Thanks, a lot.

And ladies and gentlemen, our final question today comes from Richard Branson from Goldman Sachs. Please go ahead with your question.

Hey, it's a James Yaro filling in for Richard Thanks for taking my questions.

So maybe the first one on just on the capital raising business, you've talked about the departures and the impact on revenue in that business, but maybe you could just talk about the forward trajectory and you know what weve heard pretty positive commentary on the on the recovery in that business for some of the peers. This earnings season.

You know I I don't necessarily want to forecast. The you know an individual business, but I would say that <unk> and there are many aspects of that business. I think is the important thing to understand really there you know there's fund raising you know doing primary fund placement to raise money for private equity funds. We we are not in that business some funds.

I have some some firms are in and and I, you know I'm not that familiar but I can imagine that private equity is growing and perhaps there's.

More of that coming and then there's kind of a more sort of straight forward secondary transactions, where you know one fund sales the portfolio of investments they don't want to own anymore to another fund and that we were vet and are very active in and then there's a third business, which we've spent some had some success in but we really are trying to folks.

It has to do a lot more is in the area of a secondary transactions that also involve the the the fund managers the capital at where you're kind of changing maybe your prolonging the fund maybe or you know rolling at investments that are fairly long held already into a new longer term vehicle.

It or something like that so that they tend to be very tailored very complex and you know frankly, just like in the M&A and restructuring world. The more complicated the things are that you work on tends to be the higher fees that you end up earning so we want to do more of that and I think look I think probably all three parts of that business got hit pretty hard in the pen.

Dynamic and I think there's just spend and now their spend as much volatility on the way up as there was on the way down. So you know I don't know how quickly all that will come back certainly we're not seeing you know as a robust a rebound than that as we are say in a in M&A over the last you know several weeks you can suddenly feel that M&A is really much much more active.

In terms of course.

Corporate dialogues and you know I wouldn't say, we quite feel that on the.

Capital Advisory side, but you know so clearly there's some pickup there post pandemic.

Got it that makes sense and then you talked about extremely robust restructuring for 420, and and a strong revenue backdrop generally for the coming quarter. So maybe just a on the restructuring side are you expecting a step down versus the 420 level, but activity was still remain elevated or really.

We expecting to see the strength in Fourq you 20, you know continuing at the same level of strength into 2021.

Well I think you have to with restructuring us even more frankly going to M&A you have to you have to measure or maybe if you're in my position you know running a business. They the the level of new opportunities, you're winning and sort of how busy and active your team as well you can't predict is when those things are going to reach completion. So there's it's always just like M&A is always.

Is gonna be a lumpy business and you're going to have you know some quarters, where more completions fall than others, and it's going to look like you're doing terrifically, well, one quarter and less so another quarter.

But I think in terms of the more fundamental question. The other part we really can can try to control is you know how many assignments. We win you know we feel good about that for you know certainly for the medium term in the sense that we think given the pressures of you now a second wave in the pandemic. It feels like some of the industries that have been really.

<unk> you know <unk> hurt by the pandemic are going to continue to be hurt and we think there's going to be.

You know kind of a target rich environment in terms of restructuring opportunities and we think we now have a team and a set of credentials and you know the scale necessary to win our share of those so I think we can you know what I'm, saying is I think the sort of the stuff flowing into the pipeline feels.

Like its going to continue in a very positive way for a good long time, you know how and when that stuff gets across finish lines and triggers completion fees. You know that that's just going to ebb and flow as it always does.

That's really helpful. Thanks, a lot.

Okay. Thank you and I think that was our last question. So I think everybody for dialing in and we'll speak again in about three months. Thank you.

Ladies and gentlemen, with that well [laughter] Clued today's conference call. We do thank you for joining you may now disconnect your lines.