Q4 2021 Greenhill & Co Inc Earnings Call
Okay.
Good afternoon, and welcome to the Greenhill fourth quarter and full year 2021 earnings conference call.
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I would now like to turn the conference over to Patrick's doing Who's head of Investor Relations. Please go ahead.
Thank you.
Good afternoon, and thank you all for joining us today for Greenhill fourth quarter 2021 financial results conference call I'm, Patrick soon hold Screenhouse head of Investor Relations and joining me on the call today is Scott Bok, Our chairman 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 would now like to turn the call over to Scott Bok.
Thank you Patrick we had a strong finish to 2021 consistent with our commentary on recent quarterly calls our fourth quarter revenue was $116 $7 million and we earned $1 21 per share for the full year, we had revenue of $317 $5 million and earnings per share of $1 73 revenue for the year was up.
2% over last year and earnings per share was up 27%.
Industry data makes clear that 2021 was a record year for global M&A deal activity financing and capital raising activity was also strong. Meanwhile, bankruptcy related restructuring activity was down materially given highly accommodating financing markets at Greenhill. Our global team was very busy we enjoyed a significant increase in new client assignments to Iraq.
[noise] level. Likewise, we saw a significant increase in the number of transaction announcements, which can be tracked on our website also to a record level well mentum continued to build throughout the year and in the fourth quarter. We played a role in more deal announcements than in any quarter in our history. The number of million dollar of greater fees. We earn for the year was also a record the only thing that held us back from an even stronger 2002.
'twenty one performance was the fact that we had fewer transactions in the very large fee category that has been the case historically our than we expect going forward.
On a regional basis, we saw improvement in the U S had a very strong year in Australia and another good year in Canada. In contrast, European revenue was down materially from a particularly strong result, the prior year by.
By sector financial services Health care, and industrials were the standouts, while consumer and retail was down materially from an outsized performance in 2020.
By type of advice M&A was the primary contributor to our results restructuring activity remained relatively low all year, followed by an extraordinary year in 2020, beginning when the pandemic first hit trading markets early in the year. We made good progress on our new initiative to win and execute more financing advisory assignments. Some of our most significant assignments of year involved are helping.
Clients get funding from the large and growing direct lending market and we also advised on various types of equity financings.
For our private capital business 2021 was a year of rebuilding and expansion, resulting in a modest decline in revenue by year end, we had a fully functional global team capable of raising private equity infrastructure credit and other types of funds and that team at a substantial and growing backlog of capital raising assignments that had already begun to generate revenue.
Meanwhile, we continue to be active in advising institutional investors around the world on sales or interest in such funds.
Across all our businesses, we are making good progress in our initiative to provide more services to the financial sponsors that managed private equity and other types of funds. In addition to raising capital for such entities, we advised on buy side and sell side M&A projects and worked on financing and restructuring some companies owned by financial sponsors in total about 30% of our 2000.
'twenty, one revenue related to financial sponsors and we believe we have only scratched the surface in terms of how important that client base can be to our business now.
Now turning to cost we manage our fourth quarter compensation ratio to a level that resulted in a full year ratio. It was at the high end of our target range. Meanwhile, our non compensation costs were materially lower than in the prior year at around the low end of our target range, our pretax operating margin for the year was 22% significantly better than in the prior year and our near.
Term objective remains to get that to at least 25%.
Our interest expense continues to trend lower given a declining debt level and continued low short term interest rates, our effective tax rate for the year was 28% higher than we normally expect due to the fact that our profitability was skewed to higher tax rate jurisdictions and the prior year, our profitability skewed to lower rate jurisdictions, we continue to expect our Ana.
Oh tax rate to be generally in the mid 20% range before adjusting for charges related to changes in the value of restricted stock when it best.
At our current share price, we would see a tax benefit this year as the restricted stock vest at stock prices higher than which it was granted.
We ended the quarter with $134 $6 million in cash and $271 $9 million in debt, meaning we had net debt of 107 hundred $37 $3 million during the quarter. We made additional voluntary debt payments of $20 million that are reflected in those numbers.
We made $55 billion of voluntary debt repayments in 2021, we now plan to pause further debt repayments. So that we maintain an appropriate level of trading liquidity in our outstanding debt, which we believe will facilitate our favorable refinancing when the time is right for that week.
We continue to be focused on deleveraging, but now with an emphasis on increasing our cash flow in a manner that improves our credit statistics.
In addition to repaying $55 billion of debt in 2021, and maintaining our usually quarterly dividend of <unk> per share, we repurchased $45 $1 million of stock during the fourth quarter, we repurchased 677851 shares and share equivalents for $11 $8 million at an average price of 17.
Dollars 33 per share.
For the year, we repurchased two 9 million shares in chart equivalents were $45 $1 million at an average price of $15.80 per share after quarter end, we repurchased an additional 267945 shares for $4 $9 million at an average price of $18.21 per share for.
For the year ahead through January of 2023, our board has approved share repurchase authority for shares and share equivalents of $70 million. In addition, we are announcing today, a doubling of our modest dividend in order to bring it to what we consider a more normal level consistent with most of our peers.
I will close with a few thoughts on strategy. We continue to believe in the pure advisory business model, where our interests are fully aligned with those of our clients. We believe we have the right geographic footprint in place and M&A. We aim to continue to expand our industry sector coverage in high potential areas. Apart from M&A. We aim to continue our recent initiative to provide.
Ride more financing advisory services, while also seeking more restructuring advisory opportunities as interest rates rise and credit markets tightened.
And our private capital Advisory business, we aim to continue to expand both our primary capital raising and our secondary sales businesses in all these areas. We aim to continue our recent into initiative focused on serving financial sponsors, which we believe can be a major source of growth for our firm.
In order to meet our growth objectives, we will continue to seek talent externally 2021 was a productive recruiting year for us with respect to senior bankers and we also grew overall head count slightly despite increased turnover that I think every firm in our industry is facing looking ahead, we expect a very active recruiting year in 2022 at the same time, we had a record number.
Internal promotions to managing director at the start of the year many of our top bankers around the world are homegrown and internal talent development will remain an important source of growth for our firm alongside external recruiting with that I'm happy to take any questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble the roster.
Okay.
And our first question will come from Devin Ryan of JMP Securities. Please go ahead.
Hey, Scott Hey, Patrick how are you guys pretty well got you.
Great I guess first question here I wanted to dig in a little bit on the outlook and maybe just think about it if you can characterize the backlog in a moment.
Or any kind of qualitative.
Perspective, you can give kind of how the backlog feels heading into 2022.
And then just kind of beyond that you did allude to your expectation for some larger deals are you seeing that in the backlog or mandates deals.
Deals you're working on or is that just more of an expectation that we normalize around that and if you can just maybe some initial flavor around areas that you're excited about in the business.
As we think about 2022 relative to 2021 .
Sure.
I would say look we feel good about the current environment, we feel good about the backlog we saw the number of deal announcements. We were we were associated with throughout the year kind of grow pretty steadily fourth quarter was the best one where the flow of new assignments continues to be quite strong and so I feel like we've got you know of.
Good book of business coming into the year I, both kind of in general expect a reversion to the mean in terms of you know.
Some portion of those being in kind of the very large fee category, but we also certainly see that and in the pipeline I mean, I'm talking about actual live assignments, not all of which of course will come to fruition, but but it certainly feels like we will be back to the norm in terms of the the right mix of very large along with mid size and smaller things. So.
As for wherever we're excited I mean in a lot of areas I think we can do better than last year. I mean, we had commented that we had a great year in Australia, I think we'll have a better year in 2022, we had a very good year in Canada, I think we'll do better there the industrial sector, which I've always said, it's the biggest sector group within our firm.
You know it it got hit pretty hard I'd say during the pandemic there wasn't as much activity. Those companies were impacted by you know appears a weak economy and tariffs and supply chain issues and all the rest but towards the end of the year. We saw tremendous finish in terms of deal activity in that space and in that group has got a very strong backlog right now.
So I feel very good about what is still the largest sector group in our firm.
Then lastly, I would say Europe look for whatever reason a while 2020 was an extraordinary year for us in Europe 2021 was the year in which we did a number of things over there, but many of the more important ones were for you know American another foreign clients doing things in Europe are kind of European based clients were less active last year and.
You know we think both just because it's always worked this way and also because we can look at the pipeline that we've got that we'll see a you know again or have kind of a reversion to the mean over in Europe as well. So I would be very surprised if we didn't do a lot better in in Europe , and frankly, probably in each market in Europe than we did.
In 2021, so you know if you can add that to some improvement.
And in Australia, and Canada, and some of the key sector groups in the U S.
We're feeling pretty good about the year ahead.
Okay, great. Thanks, Scott for that color and then just on non compensation costs. So this was the highest non comp.
On a quarter of the year also the strongest revenue quarter. So just trying to think about is this a good jumping off point you had kind of travel seems like it's coming back a bit but I don't know how much of that is just because of the attachment to the strong revenues just trying to think about the trajectories. This the launching pad or do we maybe revert back to something below this and that kind of work our way back up.
It's kind of a run rate.
I mean, I think for the year, we would still hope to be within the range. We lay out in our investor presentation of $55 million to $60 million, we happen to be very near the low end of that range. This year, obviously travel did pick up towards the end of the year, but there are always a lot of sort of one offs built into the quarterly data as well. So I think we'll be in that range, probably not at the very bar.
Some of it in in 2022, but I don't expect a huge increase in non comp costs.
Okay terrific just to squeeze one more quick one in just to make sure I understand it.
The new buyback authorization $70 million is the expectation to fully repurchased that over the next year or is that just that the Max capacity. So is the intention that you will work out are you going to be opportunistic and that just gives gives you a kind of a enough runway where you could be aggressive to the extent.
Yeah, there's attractive opportunities.
I would say, we're pretty inclined to use it I mean last year I think we used almost the last penny of it literally up to the last day of the authorization because you know there's only a certain amount of liquidity in the stock and you have all kinds of rules about how much you can buy back but we are we.
We bought back the full authorization essentially last year, and we will aim to do something very similar to that in the year ahead.
Great.
I'll leave it there. Thank you very much okay. Thank you.
The next question comes from Michael Brown of <unk>. Please go ahead.
Yeah.
Yes, Scott Hi, Patrick how are you guys, Hello, very well thanks.
Scott I wanted to.
Narrow in on something that you had you mentioned on the.
Capital allocation side.
A comment that you don't plan to do any accelerated debt payments in 2022.
And you mentioned a desire to refinance the debt could you just expand on that comment a little more as you see that as a as a piece of your capital structure longer term I kind of always thought that the goal is to pay that off over time and you know go.
Go back to being kind of a debt free.
But I don't know if I am.
If I'm kind of.
That's shifted or maybe I just had that.
Got it wrong.
Sure.
We obviously did make a significant borrowing to buy back a very large portion of our shares as part of our plan based on the fact, we just thought the stock was very very undervalued, we have repaid a lot of that debt on a much more accelerated basis than it was required and all we're saying now is that we're going to pause that because.
We we hear from you know various capital markets participants that.
It's a very good market for us to refinance Theres absolutely no urgency to that we can do that you know in a month, we can do that in a year. So we're just going to be completely opportunistic about that but what we do know is that the again these capital markets firms.
The kind of the larger kind that debt that.
We often compete with for M&A as well.
We're saying that yes, it's a good idea to have a significant degree of liquidity that not to let the issue get too small.
Or or it's just not as easy to refinance. So so we're just going to pause for a bit on the on the debt repayment front, let ourselves delever through you know just higher cash flow in and perhaps a bit more cash on the balance sheet and frankly, there is not really a fixed view as to what exactly capital.
Sure we want I think I've always been clear that we monitor opportunities and if it's really cheap to borrow money and we think very attractive to buying our shares.
We're going to do more of that if we think the shares are more fully valued and we think having.
That is more costly we're going to focus the cash on repaying the debt instead of.
Instead of buying back shares and frankly, where the stock is right now relative to our results. We we find it very attractive. So I think the combination of wanting to keep some liquidity.
In our trading of our loan on the market and wanting to take advantage of where the share prices right now the combination of that means that today. The right. The right strategy. We think for US is to shift more toward towards buyback, obviously last year, we spent $100 million between debt repayment and share repurchase.
And we're just talking about basically allocating.
Bigger portion of the cash flow too to buybacks in the year ahead.
Okay understood. Thanks for all that color.
So Scott you talked about the private capital advisory business and it sounds like you.
Really rebuilt that business.
Quite quickly in 2021 can you just talk a little bit more about how the revenues contributed in the fourth quarter and then.
Whats your outlook for that business as we get into 2022, obviously, you talked a bit about the.
The strength of the sponsor relationships and how important that is in Sydney, you still see that as a business that you will look to add more talent to or is it really kind of reached critical mass at this point.
Okay. So a couple of different questions there the capital advisory business.
It was not a big contributor really last year I mean, it was it was it was not a huge contributor to the year before and it was down as I noted in my remarks down slightly.
Last year, what we saw towards the very end of the year and it certainly it was not even a meaningful part of the fourth quarter is starting to book revenue on assignments that will run for quite a long time and have significant revenue potential. So so we feel like we spend in that business 2021, rebuilding the team, but actually going well beyond rebuild.
<unk> and building out a really broad primary fund raising capability.
And we put in place a book of business our pipeline of things that we'll be working on for the next 18 months and in that area. So I think that I, probably should've mentioned that earlier when somebody was asking what are the what does it sort of the potential positives in 2022 versus 2021 and are really obvious one is in this business where the team barely existed at the beginning of the year and we.
Certainly didn't have primary fund raising capability and now we not only have that capability, but we've got a.
Our active list of assignment. So so that that's a significant area for potential improvement more broadly on the financial sponsor side clearly we want to do everything for them. We had some really important M&A assignments.
Over the course of the year, especially towards the end of the year some financing assignments or were working for financial sponsors and as I noted in my remarks, I really feel like we've only scratched the surface of what's possible there.
And we are adding more resources internally, but we also are looking to recruit senior people in that space.
Because we just think the potential is so enormous we want to we want to accelerate a bit our move into providing the full range of services M&A restructuring financing capital raising to that that important client base that you know for many years, we really kind of ignored frankly, while we focused on public companies. It has now become an absolute.
Core part of what we're focused on here and we're going to add more personnel to to accelerate are accessing that opportunity.
Okay, Great Scott I will leave it there thanks for taking my question. Okay. Thank you.
The next question comes from James <unk> of Goldman Sachs. Please go ahead.
Hey, Thanks, and good afternoon, Scott I, just wanted to start with.
One of the advisory trends.
Seeing across the market, which.
Which is a large cap M&A and the potential for increased antitrust review I think recently, we've seen a number of regulators certainly in the U S are appearing.
Be examining a greater number of deals so basically what's your view on the ability for large cap M&A to continue at the current pace overall.
Accelerate from here or potentially slow down.
You know I I don't expect it to be a huge factor to be obvious to me to be honest I mean, we we we've seen many administrations obviously over the 26 years, we've been in business and some have been kind of very free market oriented than some had been much more regulatory oriented in.
In the history of our firm I believe there are only like four transactions that ever got blocked by our regulator that we announced so I'd say, that's not many of our 26 year period.
I think among the do you know if youre talking about deals that are $50 billion.
Yes, there's probably going to be more more risk of getting a deal block there deals in certain sectors like technology.
Perhaps there's going to be more risk to those but the kind of deals that can.
Generate a five or 10 or 15 or $20 million fee for us I think I think few of them will be of a scale that will what will end up being blocked by our government or any other government and.
So I don't expect.
A big a big issue there except for the very very largest deals and probably the most sensitive sectors like technology.
Okay that makes a lot of sense and then I just wanted to ask about your comp ratio, which declined over 200 bps for the full year this year too.
60%. So when you think about the competitive hiring market out there as well.
No.
General fears that M&A could slow in 2022.
What's your confidence in the ability to remainder of this comp ratio and potentially improve from here.
While the comp ratio is always really a function of revenue like my goal for 2022 is to materially grow the revenue and then I think it's easy at that point to keep the comp ratio within our target range.
Notwithstanding whatever is happening in a competitive.
Competitive markets because for most people, especially the senior people on our industry compensation is related to revenue. So if people produce a lot of revenue they're going to get paid a lot. If they produce a lot lot photo paid less so.
I think if we have the kind of year that I'm hopeful loved I, certainly would expect to be able to have a comp ratio that some.
In line with with our recent history.
Okay, and then just one last one which is.
Just on the liquidity in the stock, which you touched on but also you know you did touch on the fact that you plan to do some additional buybacks. So do you think the smaller float.
So as you as you shrink the.
Share count is a headwind for your stock and is there a point at which you would stop buybacks as a result of diminishing liquidity.
You know I'm only really interested in getting to a higher market capture a higher share price and I just think as long as it's valued at a price that's.
That's considerably less than what I think it's worth I can't resist I think it's in the it's in the.
To the benefit of all of our remaining shareholders that we we we buy out our shareholders who are willing to sell at low prices.
I've done a fair amount of that personally as well and I think in due course that that the market cap and the and the liquidity of the shares will take care of itself when the when the stock reacts to not only good results, but the fact that.
The shrinking share count and a.
A reasonable dividend.
Certainly the data has declined quite a lot. So I think all of that's going to add up to a different result, but until it does so I think we're going to keep buying back the shares.
Okay. Thanks, a lot.
Okay. Thank you and that's our last question. So we thank everybody for your time and look forward to speaking again in a few months.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
Yes.