Q3 2021 Greenhill & Co Inc Earnings Call

Good day and welcome to the Greenhill third quarter 2021 earnings call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. You ask a question you May Press Star then one on your Touchtone phone and to what.

You All your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Patrick Soon halls. Please go ahead Sir.

Thank you.

Good afternoon, and thank you all for joining us today for Greenhill third quarter 2021 financial results conference call I'm, Patrick soon hold Screenhouse head of Investor Relations joining me on the call today is 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 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 8-K.

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 made.

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

Thank you Patrick we've reported third quarter revenue of $88 $6 million and earnings per share of 85 cents for the year to date, we had revenue of $208 million and earnings per share of 55 cents revenue.

Revenue for the year to date is up 17% from the same period last year.

Industry data makes clear that we continue to be in a very strong M&A market globally for our firm that is evident in the significant increase in new client assignments. We have won this year relative to last year and the year before it is also evident in the fact that on a trailing four quarters basis. The number of deal announcements with which we are associated at ethanol is at an all time high while many of those.

Transactions were for large companies for the year to date the sizes of deals. We have completed have skewed towards the smaller end of the normal spectrum, resulting in a year to date revenue increased smaller than that of our peers. Nonetheless, we are pleased with the progress we made in the third quarter continued to expect a strong finish to the year and are confident that our revenue going forward will benefit from a rig.

<unk> to the norm in terms of deal sizes and commensurate fees.

On a regional basis for the year, we expect to show a stronger year than last year in the U S and Canada and a much stronger year in Australia offset by reduced revenue in Europe, where we had a particularly strong revenue year of last year.

By type of advice M&A continues to be the area in which we see the most opportunity restructuring remains relatively slow given the strength of credit markets, but we are pleased with the progress of our new initiative to win more financing advisory assignments and the private capital Advisory area. We've made great progress in building out our global team for both primary fund raising and secondary sale.

Transactions and both of those businesses now have strong assignment backlogs across all our businesses. We are pleased with the progress in our new initiative to do more business with financial sponsors.

With respect to recruiting our press release notes to more senior hires in M&A, one each in Germany, and Australia. We are pleased with what we've accomplished in recruiting this year and remain focused on adding more senior talent in the months to come.

Now turning to costs, our compensation costs have been lower than last year in absolute terms, given our objective to bring quarterly compensation more in line with quarterly revenue.

Our compensation ratio of 50% for the quarter brought down the year to date ratio to 65% and our objective is to bring that ratio down further by year end, while still paying our team increased compensation in absolute dollars.

Where we end up in terms of compensation costs and expense ratio for the year dependent as always on our revenue outcome for the year.

Our non compensation costs were materially lower than last year and are running at the low end of our target range for the year to date.

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

We continue to expect our annual tax rate to be in the mid 20% range before adjusting for charges relating to changes in the value of restricted stock upon vesting.

We ended the quarter with $100.4 million in cash and $291 $9 million of debt and after the quarter end, we made an additional voluntary debt repayment of $10 million.

During the quarter, we repurchased more than 637000 shares and share equivalents for a total cost of $9.5 million and in October we repurchased an additional 194000 shares for a cost of $3 $1 million for the year to date, we've used our cash flow to repay $45 million of debt and repurchased $36 $4 million of.

Shares and share equivalents.

In addition, we declared our usual quarterly dividend of five cents per share.

As I said last quarter, our principal focus is on deleveraging, but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders.

Our employees currently at about half of the economics of our firm through stock and restricted stock and thus are fully aligned and trying to drive shareholder value creation in the quarters and years to come.

To sum up we are pleased with our revenue growth and profitability. This quarter and we were also pleased with our progress on our strategic initiatives. Our goal is to both increase our total revenue and to reduce our quarterly revenue volatility and we aim to do that by expanding our client base to serve more financial sponsors and expanding our service offerings to include more financing roles and more.

But capital advisory transactions, if we succeed at a reduced cost declining debt and interest expense and much reduced share count should together result in significantly greater earnings and shareholder value creation and with that I'll be pleased to take any questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Devin Ryan with JMP Securities. Please go ahead.

Great Good afternoon, Scott and Patrick how are you.

Well Devin thanks.

Our first question here just want to make sure I heard correctly I think you said you expect to pay.

More in absolute compensation, but a lower comp ratio. So I guess that would imply an expectation for revenue growth on the year unless I misheard something in that comment I just wanted to make sure that I heard that correctly.

I think that's the way the math works hard harder to applaud our goal is definitely to pay a higher absolute compensation and we and we do aim to bring the comp ratio down further from where you know where it sat at the end of the third quarter.

Yeah, Okay got it.

It could be about to I, just want make sure right.

So okay.

Great I appreciate that.

And then in terms of kind of the financial sponsor initiatives. Scott can you maybe talk a little bit more about what you guys are doing there obviously, we see kind of the opportunity that's only grown in the market.

Sponsorship, playing a bigger and bigger role and in particular, we you know as you guys have kind of a global business and are in Europe.

Parts of Asia sponsors or are clearly you're kind of moving more global as well so.

Can you just talk little bit about kind of how you guys feel like you're positioned in some of the things youre doing to do more business with sponsors overtime.

Sure I mean, this I I can't overstate how important this initiative is because sponsors just become an enormous part of the of the M&A market and by the way also they had not a lot of restructuring assignments. They do a lot of refinancing. They obviously raised new funds. So there are many many ways in which we can we can serve them you know I think if you go back to the history of our firm we started when there were very few firms.

Ours and the competition was really all the big banks, the big banks loves the the financial sponsors right. They they really put a huge amount of effort into serving the KKR to blackstone's, the apollo's et cetera.

What's happened over time is number one they they the number of sponsors has just exploded writers.

There's twenty-five where everybody knows the name and never saw several hundred more we're you know they have different specialties in different sizes and different regional folks isn't and so on but there are just hundreds of these things and they're very very active but you know playing a very large role increasing role in the in the M&A market and so you know we realize that we had focused too much kind of almost six.

Lucidly on on public companies and frankly, even to serve those public companies for example, when they want to sell an asset to the financial sponsor world or whenever you acquire one from that World. You know we needed to have better relationships there and so the first thing we discovered is that we already across the firm had a lot of good relationships. In this space you know an individual doing health care services somebody else do.

<unk> you know packaging you know they they had a set of dialogues will we did not do was coordinate well across all of those people to make sure that that financial sponsor knows all the things we're doing for them all the opportunities we're bringing all the ideas, we're bringing all the attention. We're paying and then of course, you want to try to get paid back for that and those sponsors.

<unk> are I think very very good at understanding the quid pro quo and realizing that if they want to have you know get a lot of service from us they have to repay that they're happy to do so and so that that's what we've done a lot of it just organizing ourselves and then secondly, just getting all of our partners to pay more attention to that client base alongside their public company.

Client base and the market is so big that it's not like there's not room for another a firm like ours to focus on that community and we are really pleased with the progress. We've made so far I mean, I think even in the fourth quarter, you'll see a quite a lot of announcements that will relate to that client base, so you're going to see.

See that you know whether its financings, whether it's you know M&A transactions and clearly we're building more private capital is while youre going to see that we we are definitely making a lot more money from financial sponsors you know kind of starting in the latter part of this year and certainly it should build a lot from there.

Yeah.

Okay, Great maybe just one more thinking about the <unk>.

Log progression and the build by region you gave some good color on kind of your expectations on how the full year will shake out from a regional perspective, which is a little bit backward looking but you know are you seeing areas like Europe start to maybe perk back up a little bit relative I know you had a particularly strong year last year, but.

Any kind of difference from kind of a backlog trajectory by region than maybe our 2021 is shaping up.

I look I think the one outlier for US. This year is that we we have had less deal activity in in Europe, but I think you know we have a I think what's important for shareholders or members that work, we're not big enough to sort of track the market, we're never going to be sort of the index fund, where the market goes up 25% of we got 25%.

So I think yes, we had a very strong year 2020 in Europe for whatever reason, just random serendipity of which clients did deals in which you know auctions were won by whom et cetera.

It's been a much quieter year for us over there and pretty strong everywhere else I have no doubt that our that our franchise is stronger than ever over there and there are a lot of interesting dialogues, we have going on and I I would absolutely expect a much better year in terms of European productivity for us next year, even if.

The M&A market as a whole of the European market became quieter just because you know there's a certain amount of our success is dependent on our client base and our efforts are.

And there's some of course the benefits from just a rising market, but that's the only thing really worth highlighting I would say I would say the U S. We've had a you know we're having a solid year.

I think there's plenty of room for upside next year and beyond given particularly this this growing focus on financial sponsors as well as public companies and in Australia, We're having one of our best years in and a number of years in and frankly, I think next year will actually be better there just based on the on the backlog. So the the big swing factor for you know 22 I think.

It will certainly be Europe in a in a in a positive direction.

Yes.

Okay, Great I'll leave it there.

I appreciate it Scott Okay. Thank you.

The next question will come from Michael Brown with K B W. Please go ahead.

Great. Thank you.

Hey, Scott, Patrick Hey, Michael very well thanks.

Got to get.

So I just wanted to hear a little bit more about the about the quarter could you just give us a little bit of a little more insight into the key strengths there and then.

You're coming out of the fourth quarter as it relates to the comp ratio is certainly certainly really upbeat. So I'd also just like to hear a little bit more about what's the key drivers there it sounds like sponsors might be maybe the key element that's really heating up here in the fourth quarter for you guys, but I'd love to hear a little bit more about that too sure absolutely.

You know I think that the answer to a little more color on the third quarter and also a little more color maybe on the fourth quarter and beyond I think is a it is sort of at the same point I think I can answer both which is that.

Where this is a year for us that's characterized by smaller transactions. We don't we don't have as many of sort of the blockbuster you know really big really high profile public company deals with a really big fee attached.

To me that in some ways. It makes our result more impressive because we havent benefited from a small number of really outsized fees, but we've had you know a high volume of transactions. They just happened to have been towards the smaller end of the spectrum and and so theres a lot more granularity in our our our numbers. This year end and of course, when you have that.

Your your data can be your sort of results can be lots of visible from the outside so we are doing more financing advisory things and not all of them get announced you know those are these are almost by definition not public companies. There are there any of them. Although some exception certainly but there are cases, where people need our financing advice to go.

The very large and growing dealer direct lending market you know, it's very often it's private companies. They don't always want to announce what whatever they've done in their their financing. So there's some things we're doing that can be fairly significant that that are not appearing in our in the public domain and they're not even appear on our website in some cases, they're all the things that are just you know again this year.

Kind of a proliferation of smaller deals.

Deals that may not get as much a high profile attention. So I think that's why maybe the third quarter is better than what people were expecting and I think similarly, that's what makes us.

Feel the way, we do about the fourth quarter and frankly, even beyond that just the you know the increased granularity of what we're doing more products for more types of clients in and are you now in a wider size range I think.

Thanks for that yeah, that's that's helpful too.

I understand what's going on underneath the surface.

So Scott one thing.

You know I certainly impressed with that.

Pace of share buybacks.

Certainly above what we were expecting.

And I see that your basic share count has come down nicely, but your diluted share count is actually up versus the first quarter.

Can you explain some of the drivers there I assume there's maybe something related to the treasury method that could be impacting it but is there any other puts and takes there that we should be thinking about.

No. It it's all that really its the fact that one year in a loss position you you end up focusing on basic shares outstanding and when you're in a profit position you focus as most companies don't we normally do on the diluted numbers. So if you look at our diluted number over time, its very consistent obviously it stepped down a lot with our recapitalization of few years.

Oh and continued share buybacks, but but that that explains the whole story. So I I think you know if of early in the year was obviously, an RV at least a bit of an aberration in terms of the results and I know you know revenue at a level, where there was a loss and so you had kind of a bit of peculiarity in terms of the of the share count, but I think if.

People focus on diluted they'll see that it's been consistent and are declining and you know and and we are look we are quite active in share buybacks. We have the deleverage quite a lot, but we still think the stock is quite undervalued. So we've been buying back frankly, that's as much as we can which is <unk>.

M. It limited amount given the amount of liquidity in the stock and all of the FCC rules about how you do that but you know to the extent, we can we've been doing that and I expect will continue.

Understood. Okay. Thank you for taking my questions. Okay. Thank you bye bye.

And our last question will come from James <unk> with Goldman Sachs. Please go ahead.

Thanks for taking my questions.

Sure historically had.

You've historically had one of the strongest cross border practices out there.

So I'm curious how supply chain disruption is featuring in your and your client dialogues and then how would you contrast, the cross border versus in market M&A.

In both the U S and Europe.

First of all I would say absolutely that has been an enormous strength of our firm we have five offices each in Asia Pacific Europe, and the U S. We have a very collegial culture and people work together extremely well across borders on cross border deals. So that has been a strength I think you know kind of for the same reason I just gave a minute ago about kind of.

Have a tendency towards smaller transactions this year than in a typical year for us there have been fewer of the big blockbuster cross border deals that can generate huge fees and in a high profile, but there's been plenty of smaller transactions that are cross border between you know all of our different geographies and offices and and and I have no doubt that.

The larger ones will will come back they they they always do it's just kind of random as to what's yours. They tend to fall into some degree but that's.

That's a very very important part of our business and and frankly, even in the financial sponsor World I think it is a little bit of a differentiator for us I mean, there are firms that focus almost entirely on the sponsor community, but better much stronger in one market often the U S market and have less reach.

Globally, and we have a lot of that so.

You know I don't think you'll see you know in in our numbers sort of the huge impact of the cross border deals that you maybe have in years past, but there certainly are some really important ones there and I I I think there'll be a you know more in the fourth quarter and more as the AR as the year ago as the years go on.

Okay that makes a lot of sense and then we've talked about obviously one of the macro risks are to M&A in terms of supply chain disruptions, but one of the issues we've heard.

From from peers.

Is that there's this micro bottleneck in terms of service providers, specifically, you know lawyers and accountants hitting capacity constraints in terms of deals and this may be impacting the timing of deals is that something that you're seeing and could you characterize the impact if you are seeing it.

Yeah, I agree that supply chain disruption generally in the economy, there's not a big problem for us I mean, that's a bit of a high class problem in some ways that corporations are making such great profits and that drives more deal activity and you know if they're running out of certain supplies. That's.

Probably something that gets solved overtime for US, yes, I would agree we have seen.

Cases, where accountants are seen.

Now almost too busy to take on the incremental transaction to do maybe due diligence as part of a deal or something but but it's I would not call. It a significant factor I mean, you kind of hear about it here and there and sometimes there are some a.

Question or some maybe some minor delay or things like that but M&A volume, obviously has been running very high we've had more transaction announcements than in the last 12 months than we have in any other 12 months and you know people are finding a way to get it done I mean, that's that's one thing I think that is certainly true of investment bankers I think it's equally true of lawyers that.

They're not going to turn away the incremental attractive project theyre going to find a way to get it done obviously it can mean burning the midnight oil and in some cases and it can mean, you know trying to work in a more efficient way and clients have to you know kind of speed things along more than they might in a in a more relaxed environment as well, but I I I wouldn't think so.

A real constraint on our earnings capability at least at this point and if it did get there that would probably be a high class problem in the sense that we'd there'll be so much business that you know, we'd probably all be pleased to take a bit of a breather before taking more on.

No absolutely that makes a lot of sense and then my last one is just if you could just sort of characterize the restructuring environment, you're seeing today has it picked up.

All off the lows or is it continue does it continue to sort of remain quite muted.

I think restructuring has remained quite muted and I I think I was certainly one of the early people, saying this very early this year already but last year of course was the restructuring boom and there were a lot of deals that carried over that got that you know get into carried into this year and got done.

In most cases, probably earlier in the year, but that the credit markets are just so strong that there has not been a lot. There's some still of course, but not been a lot of restructuring activity, but the sip for the very same reason that strong credit market is driving wonderful financing opportunities across the direct lending market and I'm sure you listened to the you know the earnings calls.

The apollos and KKR Blackstone, so the world and they are putting out enormous amounts of credit and our clients can access that credit and we can help them do that and so are the people who last year. We're working on bankruptcies for us in many cases. This year are working on financings across the table from those same parties that they were working with on on bankruptcies in the.

Kind of the midst of the pandemic.

Okay. Thanks, so much.

Thank you thanks, everybody for joining and we'll speak to you next quarter.

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

Okay.

Sure.

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