Q1 2021 Greenhill & Co Inc Earnings Call

Good day and welcome to the Greenhill first quarter 2021 earnings conference call.

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<unk> Press Star then two please note. This event is being recorded I would now like to turn the conference over to Patrick Soon Hawkes director of Investor Relations. Please go ahead.

Thank you.

Good afternoon, and thank you all for joining us today for Greenhill first quarter 2021 financial results conference call I'm, Patrick So on hold Screenhouse head of Investor Relations. Joining me on the call today is Scott Bok, our chairman and Chief 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 a 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.

Okay.

Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward looking statements you should not rely upon forward looking statements as predictions of future events. We are under no duty to update any of these forward looking statements. After the date on which they are right now.

Now I'd like to turn the call over to Scott Bok.

Thank you Patrick we've reported first quarter revenue of $68 $9 million operating profit of $7.2 million and net income per share up nine cents. Our quarterly revenue was three per cent higher than last year on our operating profit and earnings per share compared to a loss last year.

Given that this quarter, followed one where we had our best quarterly revenue ever we see these as a respectable results Mark a solid start to the year. We were also pleased that after quarter end, we further accelerated the pay down of our debt and that we have made good progress toward our recruiting goals.

I will not comment very briefly on our operations as we continue through the pandemic than on the state of each of our businesses then speak on each of our key financial metrics.

As I've said on each recent quarterly call our purpose operated well throughout the pandemic at this point most of our offices have at least some people back from home and some are operating fairly normally in person attendance will naturally grow as more people get vaccinated in the virus risk declines, both generally and particularly for our people most of whom I expect have been or will be vaccinated.

The extent people are still working from home and maybe for some time to come we have proven that we can be very effective at both executing for existing clients and winning new clients in that format.

But we do think working from the office is better for our team's productivity efficiency training morale and other reasons. So our goal is to get largely back to that over the next few months and most of our office locations.

Turning to our businesses M&A activity is stronger than it has been in recent years in each of our main markets. It is particularly strong in the U S where it is running at a record pace. We see this and the fact that we are winning a significantly larger number of assignments than we did last year, just pre pandemic or the year before which benefited from a good economy and no unusual health risks the timing.

[noise] of deal announcements and completions is what determines quarterly results. So those results vary as they always have given this serendipitous nature of deal timing, but.

But we feel like we're off to a good start this year in all respects.

System with industry wide statistics the U S is the most active part of the firm, but we are also very busy in places that were less active last year like Australia and Canada.

Europe is off to a slower start this year likely because of the pandemic is subsiding of less quickly there than in the U S. Our hope and expectation is that as other countries emerge from the pandemic period as the U S appears to be now we will see economic of deal activity rebound sharply there just as we are seeing it in the U S. Now.

With respect to restructuring activity I said last quarter that activity had slowed considerably from last year's frenetic pace and that continues to be the case, there will come a time on financing markets will tightened simply because that's always the case and there will then be another surge of restructuring activity in the meantime, we are supplementing our traditional restructuring activity with an increased emphasis on <unk>.

Nancy Advisory work the debt markets have become far more diverse in recent years with the proliferation and growth of so called out alternative lenders, we can be very helpful to our clients and accessing that market.

Lastly, after a very slow period last year the market for private capital Advisory transactions is again very active in our private capital Advisory business. We are busy in Europe, and Asia doing transactions in the secondary market, including many larger more complex assignments, where the general partner of a private equity fund is accessing the secondary market to achieve strategic goals.

In the U S. We've made good progress rebuilding our team and that's part of that we have taken steps to build a primary fund raising business, which we think can be productive in its own right, but also highly complementary to the secondary business on.

Our press release note several hires we've made and there are others on progress we expect very shortly to have a fully functioning global team for the private capital advisory business encompassing primary capital raising secondary sales and general partner led fund restructurings.

Speaking of recruiting our press release also notes recent hires on the M&A side of our business we.

We have other recruits well in progress and expect this year to be an important year in terms of M&A recruiting with an emphasis on the U S market and on adding incremental industry sector expertise for a wide range of reasons, we are seeing a lot of good candidates.

Now turning to our costs, our compensation costs were lower than last year in absolute terms, but our compensation ratio was higher than our target range. Our objective is to bring the ratio down to the target range for the full year, where we ended up as always depends heavily on our revenue outcome for the year, our non compensation costs were lower than last year and are running at a rate consistent with our.

Target there were a few unusual expenses this quarter, primarily related to foreign exchange losses, and we continue to look for opportunities to drive costs lower even post pandemic.

Our interest expense continues to trend lower given declining debt levels and continued low short term interest rates are.

Our tax rate of 26 per cent for the quarter after adjusting for the impact of charges related to the vesting of restricted stock is consistent with our guidance.

We ended the quarter with $87.9 million of cash and $326 $9 million of debt, we paid down another $20 million of that debt since quarter end. We also declared on our usual five cent quarterly dividend and bought back just under a million shares on share equivalents for a total cost of $14 $5 million.

We have $35 $5 million of repurchase authority available for the Euro had through next January.

As I said last quarter, our principal focus is on deleveraging, but we also intend to purchase shares on a prudent manner to further enhance the upside potential for continuing shareholders or employees currently on about half of the economics of the firm through stock and restricted stock and thus are fully aligned and trying to drive shareholder value on the quarters and years to come with that I'll be happy to take any.

Questions.

Yeah.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

The first question comes from Devin Ryan with JMP Securities. Please go ahead.

Great. Good afternoon, Scott how are you very well Devin how 'bout Ya.

Doing great I guess first one here just on.

The outlook appreciate some of the commentary.

If we go back I think last quarter's call you talked about being disappointed if revenues didn't grow.

Year over year in 2021, so I'm just kind of curious when you put the kind of outlook together is that still kind of the view and how have things evolved in the environment over a over the past few months I guess since the last our last call that we did with you on.

I think my view would be the same as it was a few a few months ago I mean, I I still feel like we're in a kind of a as I said last quarter that restructuring clearly has slowed as financing markets have become so strong are we're trying to do more in the financing spaces as opposed to you know bankruptcy type restructuring and on the M&A side, you know if anything on <unk>.

Probably pleasantly surprised by how strong our activity is right now it is heavily weighted I would say it toward the U S market, but I really think that's a function of the <unk> of the pandemic I mean for example, Australia also very busy for US right now in Australia of course, there's even ahead of the U S in terms of coming out of the.

Out of the pandemic. So it really seems like there is a positive trend maybe better than I might have thought three months ago in terms of as countries come out of the pandemic like Australia, clearly hasn't clearly the U S is on its way toward that you know you you do get a sharp rebound in M&A activity and you know, we're certainly hopeful that Europe follows that trend in the in the months.

As it comes out you know as we go forward as well.

Yeah, Okay very helpful. And then just to pick up on some of the commentary on kind of a financing opportunity in what's been a really good environment as you noted.

Is that effectively taking restructuring bankers and pivoting kind of where they're focused or is it M&A bankers working with clients around financing needs are like how are you guys executing on this end and I'm assuming most of this activity is not showing up in kind of what we see visibly. So just kind of curious kind of how how it's half.

And then kind of if there's any way to track it from the outside.

You know when we do something meaningful in it and it's no known publicly of course, we do at least put it on our web site, even if it isn't picked up by some database who may be looking at but but it. It's primarily I would say are our we call our group financing and restructuring advisory and all the people in there in a year like last year. You know really are spending most of their time on bankruptcy related work.

But those people all have tremendous experience in financing as well obviously not for you know double and Triple a rated companies, but you know for the companies that are you know tap into the alternative lending market and things like that so you know that that group, but it's it's you know it's a great complement to what they do in a in times when there's a lot of bankruptcy because the same people have the right.

Skills and you know can do that in a period like now where you've got fabulous financing markets, which means lots of opportunity there, but less opportunity on the bankruptcy side.

Yeah, Okay got it.

And then just last one that was kind of writing down as you were talking earlier about.

Obviously.

The operating margin in the quarter, but then you know kind of your targets in the I believe mid twenties and I.

Just want to make sure I'm kind of understanding the thought process here is it reasonable to think that if revenues are willing or revenue has come in at a reasonable level. This year that you could be back at the into the you know call it target range or.

Is that kind of a longer term view I just want to make sure I kind of picked up on the way you were framing that correctly I mean it. It obviously you know margin is always going to be a function of revenue, but the you know when we put out that target last quarter as you know back to the mid twenties operating margin I mean, we we werent talking multiple years from now on.

<unk> is to get back there you know pretty quickly how exactly how quickly is obviously going to depend on how revenue materializes, but you know we do think that we've had a you know a real benefit in the sense of lower non comp costs, not just pandemic related but other things as well and that that provides a you know a big step forward in trying to get towards that goal.

Yeah, Okay, great I'll leave it there, but really appreciate it Scott sure. Thanks.

And the last question.

Comes from Richard Ramsden with Goldman Sachs. Please go ahead.

Hey, good afternoon, Scott. So just just a couple of questions from me could you just expand a little bit on your comments on restructuring and obviously I know you said that you do think it it's going to be a weaker year, that's consistent with what you said before but how has your view changed since you last spoke in terms of what you think the magnitude of the restructuring opportunity is gonna be for 2020 one.

And linked to that are some of these restructuring mandates getting executed as M&A mandates I use there are substitution between restructuring on M&A, just given the benign economic outlook and on the fact that financing is just so broadly available.

I think my view on the restructuring market is really completely consistent with what it was a few months ago. I mean, clearly there was just an enormous wave of restructuring assignments that were handed out in sort of the second and third quarter of last year. There were less of them handed out in the fourth quarter. Because you know the fed had stepped in and really made the financing.

Mark it's a lot better and and you know I expected that trend to continue with it and it really has.

Continued now we still have things working their way through the pipeline of course and getting done being being successful. So that's great. But we you know we came into the year expecting not to see anything like last year's pace of our restructuring, but again trying to shift that talent more toward financing opportunities because that obviously is a hot market and there's plenty to be done there.

Okay, and then secondly on corporate tax reform is obviously getting a lot of momentum.

In the U S. What sort of impact do you think that could have is is it too early to say, whether it's going to slow down on M&A activity could act as an accelerant as people try to get ahead of it but broadly what what are you. What is your thought process around the impact of corporate tax reform in the U S and how important is it is a dialogue on point with clients today.

I don't think it really is a very important I mean first of all I don't think most people expect a really dramatic change on the corporate tax rate I think most.

I've spoken to and and others expect that it's going to be more of a compromise outcome or if theres an increase at all it'll be something that's more manageable and I don't think public companies you know make their decisions really based on on corporate tax rates I I do think there would probably be some private companies out there, whether it's private equity owned or whether it's family owned where.

Where people might decide that they want to you know get a deal done and under a you know a lower tax regime. So maybe it accelerate things a little bit we had a couple of things last year that I think got accelerated because people expect that there might be higher corporate tax rates. This year, but I don't expect anything really meaningful in that sense in a in a positive or negative way I. Just don't think it's gonna be a big enough.

<unk> two to really change behavior.

Okay, and then lastly, both strategic and financial sponsor activity has been very very strong. So far this year as the year progresses do you think there's going to be a divergence between corporate activity and financial sponsor activity or do you think they're going to remain heavily correlated and perhaps you can just update us on what you've got to in terms of building on what you'll find.

Actual sponsored a practice, where you are and where you'd like to be mhm.

I would say I don't expect a big divergence between the two sides I mean, what what you're seeing now is public companies you know getting very active in M&A, particularly some sectors that were very quiet last year like industrials.

Companies are performing well there you know their their earnings are way up their stock prices are up I mean, there that you know they can borrow very cheaply I mean, they've got really all the building blocks in place to want to do M&A now private equity on on the other hand as its sitting there with a tremendous amount of dry powder. So they're looking to do things as well and I think that you know that that's sort of.

Alder view from years past that private equity sort of slows down when prices get high I. Just don't really think that's true anymore. I mean, you see private equity funds paying very high multiples for growth oriented companies in a variety of different sector. So I'm pretty optimistic about both types of M&A activity and you know for US where we're certainly you know we.

Got some really good mandates right now for for for sponsors, but we're in the very early days of building out what I think could become a very significant part of our business I'm you know I hope even in the next few months there'll be some you know some more tangible successes of deals that we do for <unk> for the financial sponsor community, but you know I think that business go.

Many times bigger going forward as it is for from any of our peers that focused on it a lot earlier than we did when you know when we were more concentrating on public company work.

Okay, alright, thanks, very much that's very helpful. Okay. Thank you.

And a few more questioners actually have come in okay.

If I may 1st we have a Jeff Harte with Piper Sandler. Please go ahead.

Hey, Scott Hey, Jeff.

A couple from me one you mentioned Europe being slower in North America, which were clearly seeing what are you seeing there as far as dialogues and I guess I'm trying to get to maybe what or.

The lack of face to face there is a bigger deal than it is in the U S. As far as taking deals to to the announcement stage versus kind of the underlying demand to transact.

I think there you know.

I think part of it is related to the Lockdowns and obviously they in Europe have had much longer lockdowns and kind of more severe lockdowns than we ever had in the U S. In it and you know while we will look for a while like they were somehow getting through the pandemic better than America Oh. It looks the opposite recently, so I think that's having a big impact, but I think theres also on economic phenomenon.

There were you know the U S economy is now Roaring back you see these quarterly results from companies that a lot of different sectors that are kind of just shockingly. Good I don't think that is true in Europe, yet because you know they're looking at you know very difficult G. P quarters over there because of the lockdown. So I think there's plenty of interest over there and we've seen things come roaring back on them.

Australia, we think see companies being very active in M&A in the U S and I think as soon as you see that turn in Europe, where suddenly you know GDP is growing strongly and people aren't quite as locked down I don't see any reason why you wouldn't have the same kind of a surge of activity over there I just think you know realistically it's probably.

Three to six months behind where the U S is in that in that progression.

Yeah.

Okay.

And you mentioned how strong the environment is now and we see and hear that a lot excuse me could you kind of maybe put that in your opinion, a little bit in context into kind of what you've seen in prior periods of cyclical strength from just kind of it seems like things are exceptionally strong now universe. The past I'm wondering if you're kind of sensing that as well.

Yes, I would say that you know what one thing you learn a lot on this business and I'm sure you guys. All day with his research analysts as well as you you know you kind of look at the you know three or four months into the year and see how M&A is trending versus past years and picture could look very different you know as you get to the end of the year because sometimes you have a very strong start sometimes you have a strong finish. So you can't you know always.

Just annualize things and think that's where they're going but if you looked at the first four months of this year, you would say that in Europe, and the rest of the world, It's a little bit better than it has been in recent years in the U S. It's like you know, it's like 50 per cent above the best it's ever been I mean, it's it's it's really pretty extraordinary.

Mary levels of deals and you know I've always looked at sort of the number of 500 million dollar or greater transactions that certainly off to a you know a record paced by a significant margin on the U S or you look at deal volume. It's the same thing. So so the U S is really a standout and I think it's important to look at it regionally because it globally, yes, the numbers look strong, but if you break it out regionally.

What you see is really just kind of extraordinary level of activity in the U S and frankly, just a little bit better on the rest of the world, but again I think as as Europe comes out of the pandemic hopefully they catch up.

Yeah.

Okay. Thanks, Thank you.

And Sir currently the last questioner is Michael Brown with <unk>. Please go ahead.

Okay, great. Thank you operator.

Hey, Scott it's wanted to start on on stacks, obviously, that's been kind of the hottest trend in capital markets.

Over the last few months.

Obviously going through some indigestion that the current moment, but we saw that in the first quarter. It looked like you guys were involved in some some transaction. So just wanted to hear you talk a little bit about greenhouse capabilities, there or is that an area that sure.

Looking to do a little bit more investments in and then what is what is kind of your expectations for Hum.

On the M&A side of the market there.

The sponsors flying targets, how that'll play out and how that could play out for Greenhill mhm.

Well, we've certainly been quite active in Spacs and spent a lot of time on it we have just a lot of dialogues going on related to Spacs and there's kind of two types of roles at least as we see it I suspect other firms probably see similarly, I mean, if you're on the buy side for US back I think there tend to be a lot of advisors involved and the fees are you know, they're they're nice to have in the crude.

Children are nice to have but they're not they're not extraordinary the better roll on in terms of economics has to be on the sell side selling something into the spec community and we've had some of those as well I'm. Just you know some pending others kind of in the earlier stage pipeline and you know those are very attractive because you've got a lot of spacs looking to you know too to make acquisitions in.

You know frankly, probably more than of our targets for them to get so you can get it you know good valuations and you can certainly get you know appropriate fees for that kind of work I I don't think the spec phenomenon that's going to continue indefinitely that that's been my view, all along and you see a little bit about it you know kind of signaling that on the market right now, but I do think it's got away.

Further to go I feel like we have all the capability, we need to do a lot of business in that area, but we're also not you know acting as if this is gonna be sort of a long term trend. The way you know other types of public company M&A or financial sponsor activity or it's just kind of the it it just kind of a phenomenon that's happening right now.

For the last year or perhaps for the next year, maybe two but I think probably goes back to Aurora more on normal level at some point.

Okay, Great I appreciate the perspectives on that.

And maybe just two quick ones on expenses.

You had mentioned you made reference to some episodic items in the non comp line.

Line. This quarter can you just quantify those just so we understand where they are and make sure we are.

Jumping off points here.

Hum.

It's not it's not like it's extraordinary but you know we had you know every year, there's just minor sort of foreign currency things and you know last year's first quarter. They were a positive in this year. They were a negative. So the net is you know is somewhat meaningful but you know there there's always someone off seats each quarter and you know we're within our target and I continue to think that there you know we tried.

To be conservative in setting that target. So I'd like to think we can do even a little better than that on the non comp side. So we're you know we're very happy with the way costs are playing out and you know there's a on Mt. That's meaningful enough that its worth mentioning in our you know our press release on our 10-Q, but it's not so extraordinary that I would sort of change my outlook for the future.

The run rate of cost.

Yeah.

Okay, and then on comp expense comp dollar expense.

I heard your commentary about the operating margin on them on my team.

To be on the right way to think about the business, but if you think about kind of the near term comp dollars, which came down nicely year over year on the first quarter.

Any color on how that trajectory or cadence could be for this year, just sounds like you're expecting a pretty active hiring environment and down I'm just trying to square those things with.

How does the comp dollars could play out.

For the year.

You know I think we we really aim for a comp ratio on an annual basis and you know we've done a reasonable job of getting there not always at the at the beginning of the year, but you know what we normally get there I think we expect to do a lot of recruiting this year, but I wouldn't expect to do so much that it would have a dramatic impact on the comp ratio. So I think we can you know continue.

To work on getting our our comp ratio targets and at the same time make some significant hires on you know on on at least two parts of our business you know without taking away from that goal.

Okay.

Okay. That's helpful. Thank you for taking my questions. Okay. Thank you.

This concludes our question and answer session I would like to turn the conference back over to Scott Bok for any closing remarks, Okay. I'll just say thank you everybody and we look forward to speaking again next quarter.

Okay.

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

Yeah.

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