Q2 2021 Houlihan Lokey Inc Earnings Call
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Good day, ladies and gentlemen, thank you for standing by welcome.
Oh, Okay second quarter fiscal year 2021 earnings conference call at this time.
Participants.
No.
Question and answer session will follow.
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Please note that this conference call is being recorded today between 2020.
Let's turn call over to Christopher Crain, Houlihan Lokey as general counsel.
Thank you operator, and Hello, everyone.
I know everyone should have access to our second quarter fiscal year 2021 earnings release, which can be found on the houlihan Lokey website at www Dot NHL dot com in the Investor Relations section.
Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward looking statements. These.
These forward looking statements, which are usually identified a use of words such as will expect anticipate should or other similar phrases are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results could differ materially from what we expect.
Therefore, you should exercise caution.
Interpreting and relying on them.
We refer all of you to our recent actually see filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.
We encourage investors to review, our regulatory filings, including the form 10-Q for the quarter ended September Thirtyth 2020, when it is filed with the FCC.
During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance.
These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measures. It's available in our earnings release, and our Investor presentation on DHL Dot Com website.
Hosting the call today, we have Scott Beiser, who wouldn't have Lucky Chief Executive Officer, and Lindsay Holly Chief Financial Officer of the company.
I will provide some opening remarks, and then we will open the call to questions.
With that I'll turn the call over to Scott.
Thank you Christopher welcomed.
Welcome everyone to our second quarter fiscal 2021 earnings call.
We have successfully been working primarily from home now for a little over seven months.
Has been blessed with very few cases, it COVID-19, because pandemic has had a terrible effect on families around the world and we continue to do everything we can as individuals and as a farm to help with.
Engineer, our business and personal work styles as best as we can in order to provide a safe and successful work environment for our employees clients and shareholders.
Notwithstanding the ongoing challenges the phone produced solid quarterly results.
Second quarter fiscal 2021 revenues were 276 million slightly up from last year and significantly improve the 211 million reported in the first quarter.
Our adjusted earnings per share were 75 cents up 7% from last year and a major improvement from the 56 cents reported in the first quarter.
Second quarter benefited from a significant increase in closings in financial restructuring very strong capital markets and an improving M&A valuation market.
Currently the overall economic environment is very conducive to our balanced business model our.
Our financial restructuring results are at record levels, and we expect to experience elevated levels for some time.
Meanwhile, the favorable interest rate environment and stable asset valuations over the last few months have prompted strategic firms and sponsors to re entered the M&A marketplace.
To improve deal closings that versus Q1.
But more importantly to a substantial increase in new business activity, which should have a positive impact on subsequent quarters Kemper.
Tampering our outlook, we still have concerns about the pandemics ongoing influence on the world economies.
Certainty and the U.S. elections, and the ultimate outcome of Brexit that being said today, we feel more confident about our business prospects and earlier this year.
Our financial restructuring business reported a 125 million in quarterly revenues and 214 million for the first six months of our fiscal year.
We have more mandates today than we did during the great recession, but they are but there are only a limited number of mega size restructurings relative to that.
We have closed a record 59 deals year to date and the number of active assignments is at record levels.
Business activity remains at elevated levels, but the pace of new business in the second quarter slowed from the torrid pace exhibited at the outset of the pandemic.
As I mentioned on our last call. We expect short term restructured results to be lower than originally anticipated at the outset of the pandemic, but we expect that we will experience elevated levels of restructuring revenues for longer than originally anticipated.
Our corporate finance business has dramatically improved from the first quarter.
In the second quarter, we reported a 108 million in revenues versus 88 million in the first quarter consistent with revenue growth.
<unk> 53 deals in the second quarter versus 35 deals in the first quarter.
Furthermore, this quarter, we experienced a record level of new business activity. However, it will take some time for this new business to translate into revenues.
Business activity is being generated from both corporate and private equity clients business is also fairly diversified across our industry groups. Many of the transactions. We previously described as on hold are now active again and the number of new inquiries has accelerated since mid summer.
As mentioned earlier there are still several macro economic factors that may eventually have an impact on close rates for our new engagements.
Our financial and valuation advisory business is experiencing many of the same favorable trends as corporate finance revenues in the second quarter were 42 million versus 35 million in the first quarter and up from $40 million in the same period last year.
The number of quarterly fee events average fee size and revenues per MD are now similar to last year's results our.
Our portfolio valuation segment continues to exhibit strong growth and we are experiencing improvement in our transaction opinion business as well.
Turning to our acquisition activity in August we closed on our previously announced acquisition of MD and VP capital and they are off to a great start.
Continued to be an active dialogue with several potential acquisition targets. However, the intensity ever discussions has tempered since last quarter. The rebound in global M&A activity over the last several months has encouraged some firms to remain independent and other firms to increase their valuation expectations.
Levels, we believe our and support it.
That being said our acquisition strategy has always been to be patient and to find the right farms for the right reasons at the right price.
In closing we have experienced significant changes in the overall business environment and the positive outlook at the start of this calendar year. So pessimistic outlook. This spring to the rapidly improving market that exists today.
Welcome change and in most instances may thrive it our commitment to shareholders and employees is that we will continue to build our balanced business model to mitigate the effects of volatility in the results that would.
That I will turn the call over to Lindsay.
Thank you Scott [noise].
Well the reason for that is 108 million for the quarter compared to 156 month period.
Last year.
Lower revenues were 12 or the decline in the number of closed transactions, there's always a slight decrease in our average transaction fees on closed deals.
And that's restructuring had a strong second quarter delivering 125 million in revenues.
The 2% increase from the same period last year.
Higher transaction volume higher monthly retainer fees drove the increase in revenues, we closed 30 transactions compared to 17 in the same period last year.
Increasing the thing retainer fees as a result of a significant increase in the number of current engagements driven by the pandemic.
[laughter] natural and valuation advisory revenues were $42 million for the quarter compared to $40 million for the same period last year, we had 539 feedback during the quarter compared to 523 in the same period last year overall, the theoretical improving results across its service lines with portfolio valuation leading the way.
Which contributed to solid quarterly results.
Turning to expenses our.
Our adjusted compensation expenses were 175 million for the second quarter versus 165 million for the same period last year.
We had one adjustment this quarter or deferred payments related to certain acquisitions.
Our adjusted compensation ratio was 63.5% for the quarter, which is above our long term target for adjusted compensation ratio of between 60.5 and 61.5%.
Our year to date compensation ratio is 63.1%, which reflects a reasonable proxy for the balance of the year.
This increase in competition expense ratio over our targeted range is primarily a result of our estimate reimbursable expenses for fiscal 2021 will be significantly lower than last years.
Our compensation expense ratio is tied to gross revenues, which is calculated as fee revenues plus reimbursable expenses.
While we paid compensation based on revenues or competition expense ratio increased to account for the lower reimbursable expenses incurred as a result of the cobot pandemic.
Our adjusted non comp expenses were 29 million for the quarter versus $44 million for the same period last year a decline of 35%.
Resulted in an adjusted non compensation expense ratio of 10.4% versus 16.2% in the same quarter last year.
This decline is a direct result of lower travel meals and entertainment expenses and lower marketing office related and other operating expenses all reduced due to the stay at home water implemented because of the pandemic.
We expect to continue to see significantly reduce non compensation expenses in v. two categories at least through the balance of the fiscal year.
This quarter, we adjusted three items out of our non compensation expenses.
1.3 million acquisition acquisition related cost for our acquisition of <unk> capital.
America.
And finally, we are pleased to announce that we are paying a dividend of 33 cents per share.
Payable on December 15 to shareholders of record as of December 2nd.
And with that operator, please open the line for questions.
Thank you I'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to larger smartreach our equipment again press star one to ask a question.
And we'll take our first question today from an ankle selia with Morgan Stanley.
Hi, good afternoon.
You spoke last quarter about the fact that the number of deals on a whole devices. A number of deals that were being made it is sort of more favorable in this cycle than prior downturns I was wondering you know what the uptick in revenues this quarter how much of the activity that's come through his deal closings from pending deals.
Already on the Cogs Pico that glasses.
How much of it is new activity that announced and closed during the quarter.
So.
We don't track necessarily specifically, what sort of pretty cold bid versus what is transactions that have been announced and closed within the same year I'm sure. We could go back and find that information I think you can.
Assume though that some of the transactions that are in our revenues in public finance were transactions that had previously been put on hold the M&A processes.
Nine month process or so so you transactions that have come up post March 31st some of them have close but the majority of them will likely close assuming all goes well in quarters, three and four so a big chunk of that 108.
His or transactions that were in place pretty go that would likely put on hold and have kind of the reconstituted.
Great and just.
Just a clarification on the comp ratio.
Should we look at your year to date comp ratio and then.
Take that going forward for the rest of the year or were you, suggesting that the full year comp ratio will come closer to 63.5, and if you kind of.
Quantify the impact on the comp ratio from the lower Reimbursable expenses.
Yes, so we're estimating reimbursable expenses and we've been relatively conservative estimates, so I prefer not to share that number with you, but with respect to how you should model it and I mentioned it in my notes I think our year to date kind of 63.1%, 63% is how we're thinking about it for the balance of the.
Sure in terms of the target.
Great. Thanks, just the 63 point to 63.5% was merely a catch up from the first quarter.
Thanks.
Next we'll hear from Devin Ryan with JMP Securities.
Hey, good afternoon guys.
I think Evan.
Just first question here on.
The you commentary on onto the acquisitions that you are looking at.
Obviously.
Sounds like potentially.
He puts down a bit or maybe maybe they don't happen.
No that's down when you issued 3 million shares earlier in the year some of that cash was back towards acquisition. So I'm just curious.
If it's kind of those deals.
We kind of move along here look like they're not happening.
Do you increase we're seeing about increasing buyback or returning use some of that through dividend or do you like operating with having that additional box or a flexibility to the extent something else comes long beyond the specific situations.
Well I think when we raised the capital back in May.
His view this is probably a one to two year time horizon in terms of finding and ultimately closing on transactions and not a one to two quarter.
Which is really where we are relative to the may time period.
We are still in active dialogue with a handful of companies as we mentioned on the call and some of the conversations we had several months ago and maybe slip the way they may come back for the reasons that I stated so were maybe a little timing as you said, it's probably been in long dated a bit and ultimately our view is that we will still fine.
Attractive acquisitions, but if we don't you don't deploy the capital then we will use it.
You know through a buyback or a special dividend eventually we will not hold on to a significant amount of excess capital Thats what happens down the road.
Okay.
Sure the color and then just a follow up on the capital Advisory.
All right I guess contribution if you will obviously, there's been a lot of activity in the market.
Did you guys have a little bit of a differentiated business there as well I'm curious if there's any way to frame out.
How that business is trending and contribution and how thats been stealing within the firm and just.
Any any parameters you can put around in terms of contribution and then just expectations for the outlook there as well.
It's still a very important part of our business how is primarily in our.
Corporate finance area.
It's still growing.
You know we tend to do much more on the debt capital side than the equity capital side and in the early days of the pandemic you might call. It some form of.
Rescue.
The financing that what's needed and it seems to be evolving now into financing. So for some companies that have some difficulties, but in many cases, it's now turning into capital to assist in transactions and growth avenues that various companies might have and we continue to believe very strongly that it will be a growing part of our total bill.
Yes.
Okay, Great I'll leave it there thank you guys.
Thanks, Kevin Thanks, Kevin.
Richard Ramsden with Goldman Sachs has our next question.
Hey, Thanks, it's change or a filling in for Richard Branson. Thanks.
Thanks for taking my question.
So the first one is how are you thinking about the impact of the accelerating cobot cases, and mounting number of shutdowns in Europe and do you expect this to impact either the revenue pipeline and is this perhaps one of the factors impacting.
The ability to acquire firms in that part of the world.
Yeah look I think none of us have by any means the crystal ball and where we're going with all of the pandemic.
You know for a while what looked like a Europe was improving much faster than the U.S. last.
A couple of weeks, it's it's reversed I escape.
This case.
I think a couple of things one and generally speaking finance Sears investors companies were all figured out how to.
Lives in this environment. So we clearly have seen as I think you know our peers have as well and improved market place on the other hand, I think theres still volatility to calm that could slow down deals could be another incremental bump to performance in the restructuring group over time.
I don't think that there is some magic.
Time period that we know exactly when all this will and so.
Activity is clearly increasing but we do expect that we will continue to be some bumps in the road and that's part of our commentary on why we think potentially the timing I'm closing of deals even the ones that we have reengaged on her brand new may take a little longer than what we saw pretty cold dead, just because it may not be smooth sailing between today and.
The close out of the pandemic.
That makes a lot of sense and then just more of up tick.
Question, which is you obviously had a little bit of an off cycle, increasing your dividend relative to what you have historically increased the dividend in prior years is this more just a catch up from the fact that you didnt increase it six months ago, and we should think about.
The timing of future increases to be more at the beginning of your fiscal year or is there. Some other shifting the capital return priorities.
Yes, I think historically would have found this.
Analyzing and making a change if the board wanted to make a change in our dividend probably in our may cycle, we happen to do at this time in our July cycle.
And I think it was just recognizing.
The newness of the pandemic in May it just didn't see the right time to raise dividends, we clearly felt much better about the economy, our business model et cetera comes July and we've continued to feel better about it so keeping.
Typically.
You are right I would say the May time period is normally when we look at it and this particular year, we decided to just kind of delay that decision for a quarter.
Understood. Thanks, a lot.
Thank you.
Next we'll hear from Brennan Hawken with EUV, yes.
Hey, good afternoon, how are you Scott linear.
Hey, Brian.
Quick.
Quick one on following up on that question on Europe, actually, but but narrowly focusing it a bit to the restructuring side of things.
We saw.
So sort of a head fake where it looked like Europe had things more under control and then.
With with the resurging by virus, there and now lockdowns interested at whether or not you saw any shifts and the velocity of restructuring activity or mandates whether you saw that you know.
Step back.
In the region result in any increased activity and whether or not that would lead you to expect a similar thing to happen. If we should experience such things in other parts of the world.
I think the really wanted a map out a monthly or weekly new engagements a timeline in which.
None of US look at it that fine tune of a time period that if we did I don't think much of that difference in statistics has to do with weather Europe was opening closing down or what might happen in the end the rest of world I think what we found is there is still a certain percentage of businesses across the globe.
Whose business models that once worked.
They will not work are going to need to be meaningfully modified going forward. Some.
Some of these companies have been able to be helped out because they were able to raise some debt money.
Lesser extent equity money and effectively putting on additional debt in a company, whose business model still needs to be altered is not a long term solution. It may be a short term solution.
So I think we're going to see some waves of.
Incremental restructuring business down the pipe as well, but I don't like I said I don't think particular changes week by week or month by month have been influenced per se by.
What's happening in shutdowns I think that probably has more impact short term on our corporate finance business and less impact on the restructuring business.
Okay.
And then when you think about the composition or restructuring revenue can you give us a rough idea of what how it breaks down you know as far as retainers for success fees and such is there a way you could give a rough indication of that composition.
Yes, Brian it's a good question, we don't we don't disclose that I mean, I think we have disclosed before kind of what our breakdown of better versus creditor is but we haven't gotten into specifics regarding retainer fees.
And probably prefer to keep it like that.
Okay, well, let me, let me try and get out a different way than Lindsay I'll take them all again on that one.
How about.
You know I know, there's a lot of volatility in the restructuring line when we think about it from a modeling perspective.
You should should this past quarters.
Results be a reasonable jumping off point for when we think about it from here.
Or is there still too much quarter to quarter volatility for that or was there is there a reason to believe that the restructuring this quarter was.
Particularly robust and maybe might not necessarily be repeated in the near term.
Yeah, I would say that I would normally say that there's too much volatility to use this quarter as.
As a proxy of what Q3 or Q formula might look like having said that we didn't take on a number of cases in Q1 in those cases have started to close and we'll continue to close into Q3 and Q4. So.
So we do expect our continued elevated quarters in Q3, and Q4, but that volatility of a 10 15 $20 million engagement is still there.
So you're not going to see anywhere near the same group profile in restructuring, but you're going to see in corporate finance coming out of a of a shock to the system like you saw in Q1.
And so, yes, but but I'd caution you not to look at it as hey, I got growth in restructuring coming up in Q threes and Q4, I don't think its going to look like that but you are going to see elevated over previous years.
And Vernon I might add pre prepared to panic.
We probably range quarter by quarter and restructuring between 50, and 100 million and that's just kind of the normal quarterly troughs.
Troughs valleys you have I think you still have that kind of dynamic post connect it just were at higher troughs and higher picks.
Picks than we saw before.
Okay. Thanks for that color.
Well now hear from Ken Worthington with JP Morgan.
Hi, Good afternoon, No Big conference call can.
Exist without a political question, so or with politics coming into play here in.
In terms of corporate finance do higher capital gains and dividend taxes for the wealthy.
Threaten or enhance the middle market M&A business.
And maybe how might a big round of stimulus impact either the timing or the magnitude of restructuring restructuring business, maybe maybe not at all and then any thoughts if theres a change in the political environment, how that might flow through in any way through the valuation business. Thanks.
Oh, absolutely no difficulty in answering those questions [laughter].
Maybe dig in a reverse order I think on the valuation side good.
Turning on the outcome of the elections, we could see a decent amount of increase in the in our third fiscal quarter in terms of a certain kind of state and tax planning work if people think actual tax rates will change.
In 2021 and beyond.
Because you can actually start that work in the next week or two.
Long term if there are changes in tax rates, usually that is good for valuation just because when there's changes people have different.
Strategy, So I think they're either neutral or positive in terms of changes in the tax code and the outcome of the elections on the corporate finance side, we have talked for several quarters that there would be some amount of companies who might want to accelerate and purposely try to close the transaction by December 31.
At this juncture its impractical for anybody to hire us with two months to go and say get to close by December 31.
Even in the last quarter it was pretty hard to do that we have some amount of transactions. We think have been motivated by potential changes in the tax code elections et cetera, actually probably not as many as we thought.
There would be so I'm not sure there's going to be as much of it a change there I think actually the pandemic.
Ability for people to figure out how to work remotely which business plans are working or not working has much more positive or negative influence on our corporate finance business at this juncture than what happens in the elections in tax rates and in terms of the stimulus I think the stimulus would clearly help.
M&A activity.
I'm not sure once again, the stimulus will meaningfully help.
Health companies not go into restructuring that otherwise need to go into restructuring. There's still comes down to if you have a business plan that no longer works in today's consummate.
In front of a lot of money out there and it may delay things, but its not going to completely get somebody out of the other way so.
We think about it all the time, we're talking to our clients and prospects out all the time.
None of us are smart enough to know what's going to happen, but even if we knew the outcome what will happen post that outcome and so we do the best we can and planning and I guess, there's at least some of my thoughts in terms of your politically.
Charge questions center on multiple product lines.
Awesome, great. Thank you very much.
Okay.
Your final question will come from Steven Chubak with Wolfe Research.
Hey, guys, it's Brendan filling in for Steve Hi, John.
So I guess first question is.
Pertaining to like the difference and recovery between Europe, and U.S. European deal activities. Since we are largely driven by middle market like U.S. has been driven more so by large deal activity I guess, how have your conversations in different and the different locales and what do you think are really what would you think it would.
I see it the U.S. market live it can be.
No market.
I think let's start with you I think the us middle market.
M&A business is really cooking.
It's as Scott mentioned in his comments, we are seeing as much activity as we've ever seen that activity is new engagements in new engagement take months to complete and so you won't see the revenues in this activity for you know for a couple of quarters at least.
It is it is a very very good M&A market, right now and especially in the middle market.
And Thats really driven not just by private equity coming back into the picture, but also corporate strategic so you're seeing some.
Pretty well known names transacted, the much higher levels than the large account space, but there is a lot of activity going on in the middle market and ER and we're benefiting yet from it as we should.
I think with respect to Europe or it's not.
Not a dissimilar comment we're seeing pretty good activity in Europe, it's unclear to us as of now how the.
If the recent shutdowns and the recent spikes are going to affect that it made and they significantly but prior to really the last couple of weeks the new us into European markets were both quite active really since you know since the beginning of June.
Sorry, beginning of September.
Great and I guess, one follow up on the privates.
How much of that do you feel like is pull forward and became a center bar.
Increased nickel capital gains tax and how much of that do you feel it's actually sustainable.
I think you missed maybe the first half of your question can you just reviewed.
Sorry on in terms of price.
Private so you just mentioned, obviously theres a lot of discussion around raising capital gain side. So I guess, how much of that activity do you feel like is pull forward on and how much do you feel like it's sustainable.
Because I think like I said earlier I think the whole motivation to get a deal done sooner versus later and kind of your pull forward question.
Relatively minor to the overall.
Scheme of our firm just is it just not been a giant rush I wouldn't describe it as a material part of the things that we're working on today are things at a clause that we might see some incremental revenues in Q3.
But its discounts going.
I mean, the rest of it is very sustainable.
Great. Thank you for taking my questions.
Thank you.
That will conclude today's question and answer session will now turn the conference over to Scott Beiser for any additional closing remarks.
I'd like to thank you all for participating in our second quarter fiscal 2021 earnings call and we look forward to updating everybody on our progress when we discuss our third quarter results for fiscal 2021 this coming winter.
Bye bye.
That will conclude today's conference. Thank you for your participation you may now disconnect.
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