Q1 2022 Greenhill & Co Inc Earnings Call
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Good day and walk them through the Greenhill and company first quarter 2022 earnings Conference call.
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Now I'd like to turn the conference over to Patrick Schultz Director of Investor Relations. Please go ahead.
Thank you.
Good afternoon, and thank you all for joining us today for greenhouse first quarter 2022 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 .
Early 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.
Yeah.
Thank you Patrick we've continued to see a high level of client activity and our pipeline is strong, but we had a light first quarter revenue terms given relatively few significant transaction completions, our revenue for the quarter was $45 $4 million. Our backlog suggests that this year is likely to play out like the last few where quarterly revenue range from.
The 40 million to the 140 million annual revenue was weighted to the second half and by year end, we had achieved a respectable full year outcome for this year. We expect another increase in full year revenue. Despite well look so far like reduced transaction activity in the global market relative to last year.
Meanwhile, we continue to remain disciplined on our expenses that should lead to another year of strong cash flow investors may recall that last year, we spent $100 million on debt repayment and share repurchases. This year, we plan to focus primarily on share repurchases for so long as we believe as we do currently that our stock is significantly undervalued now I will go into a little more.
Detail on each of the points I just summarized in terms of client activity and revenue recent changes in the economic and market environment should increase opportunities for us in some areas, while reducing them elsewhere. The war in Ukraine may be dampening deal activity in Europe , Although we still expect an increase in revenue from that market compared to what was a quiet year for us there in 'twenty two.
'twenty one offs.
Offsetting that higher commodity prices should result in more deal activity in Australia, and Canada, and with energy and mining companies everywhere and higher interest rates and lower market valuations should lead to more acquisitions by strategic buyers with strong balance sheets, while perhaps reducing M&A activity by financial sponsors with respective financings less.
Dating credit markets will likely reduce overall activity, but should force more borrowers to access the direct lending market for their borrowing needs.
At this point it looks like 2022 for us will be a year, where our historic focus on M&A advice for our historic public client base.
Public companies will be central to our success.
At the same time, we remain focused on our three recent strategic initiatives that I spoke up frequently last year.
First is expanding our coverage of financial sponsors we made good progress on that last year and have an important new managing director hire in this area joining us shortly who will help us build on that.
As winning more financing advisory roles. We also made good progress on that last year. When we believe that increasingly challenging credit markets will drive more clients to the direct lending market, where we can both provide access and advice.
Third is our private capital advisory business, where over the course of last year, we built out a global capital racing team for private funds of many types, including private equity infrastructure credit and others that team already has a long list of funds in the market seeking to raise capital and we expect it to become a significant ongoing contributor to firm revenue in the next couple of.
Orders.
Meanwhile, we continue to develop the secondary aspect of this business and we have an important senior recruit set to join us in that area soon including him and the other senior recruit I just mentioned, we currently have 80 managing directors.
Turning to our costs, our compensation expense for the quarter at $46 $8 million was slightly lower than last year's in absolute terms.
The compensation ratio was higher given the lower revenue outcome, but just as we did the last past few years, we expect to bring that ratio down into our target range for the full year as increasing revenue materializes in the next few quarters or.
Our non compensation expense was also slightly lower than was the case last year and at the low end of our target range, which is pleasing given the we're starting to see increased client travel as the pandemic winds down.
Our balance sheet is strong with $83 $3 million of cash at quarter end, which is usually our seasonal low point in terms of cash given the timing of bonus payments and employee stock vesting.
Our debt is unchanged from last quarter at $272 million and after repaying significant unlocked that last year, we will continue to pause further repayments in order to ensure appropriate liquidity and our loan, which we plan to refinance in coming quarters, we repurchased $19 $8 million worth of shares and share equivalents during the quarter and we have.
Just under $55 million of share repurchase capacity remaining we aim to use that authority just as we did last year given the pause on debt repayment.
With that I'm happy to take any questions.
Okay.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on phone.
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The first question comes from Devin Ryan of JMP Securities. Please go ahead.
Hey, great. Good afternoon, Scott and Patrick how are you good how are you.
Doing well.
I guess wanted to dig in a little bit more around the outlook here and obviously expectations for another year of growth against that.
It's pretty choppy backdrop for that.
Markets and for M&A more broadly so that that would potentially make greenhill an outlier.
A year at least based on expectations in the market and so you spoke to kind of a changing yeah.
Mix relative to maybe what we were looking at heading into the year, how much visibility do you have into that you know clearly I think you're hitting on some of the sectors that it would make sense, we will be more active but is that already in the backlog or is that just where the conversations are picking up and then.
Is there kind of a timing dynamic here, where just given the volatile markets. It can take time to kind of reset price expectations on kind of the negative side on the positive side and so that then gets you to that.
Back half weighting for the year, if you will.
Well I think based on you know a lot of years of doing this I would say that unless an assignment is pretty far advanced by April or may.
If it's a large one you're probably not going to get it done this year. So so when I'm speaking about how we expect the year to play out I'm definitely speaking to things that we're very actively involved on right now so in that sense, there is reasonable visibility now which deals actually get to.
By agreement in completion and so on obviously there is always.
Uncertainty around that but when I look at the whole backlog and focus on things that are are you don't have enough momentum.
Minimum and enough progress to date.
That they can get done this year I mean that that's that's kind of what leads to my confidence in you know I'd also point out that you know last year the market for sort of M&A activity grew very substantially and our revenue grew very modestly in all.
This year I think we can kind of maybe reverse some of that by Oh, I think quite likely having higher revenue on what will quite likely be a smaller market. So you know a firm of our size that's going to happen, sometimes where you may have a year of sort of underperformance relative to the market just because your.
To your deals.
It didn't get done or you know last year, we talked a lot about having a very high volume of deals, but not that many big deals. We think this year kind of as is more likely to revert to more of the norm for us, which as you know skewing maybe toward larger things with with larger fees in the public company realm. So so that's kind of in the mix of my Mic.
Comments as well.
Got it okay very helpful. Scott Thanks.
And then in terms of just.
The backdrop for new talent so.
When things are really active it seems like it's maybe hard to pull people away from their current firm, but when things slow a bit for the industry. Maybe more people are open to having a conversation or moving and so I'm curious kind of particularly if you feel like youre going to have.
You know another growth year, how those conversations are going and just what the expectation is this year in terms of ability to really.
Move that senior banker head count higher.
I I alluded obviously, the two senior hires both of which are signed up for quite some time now but will be announced when they join us.
Very soon.
So so we do have some and obviously a number of other dialogues going on I think it's interesting how quickly the dynamic in the market can change I think if you. If you looked in January of the year, just a few months ago I think most bankers that big banks were coming off a fabulous year driven by.
Tremendous back issuance and other ipos and a huge year for leveraged lending and you know and love and wondering why would it not be another fabulous year in 2022, I think that outlook is rapidly changing and how the spackman seems to be essentially over ipos are way off leveraged lending is is way off and I.
Suspect that as the year wears on and then into the beginning part of next year.
Life at the Big banks, which fell I think pretty attractive last year is going to feel much less so and and so I think there are always people who leave for one off reasons. We tried a couple now as I said already you've already signed up to join us that are in that category and many others will sort of following that kind of serendipitous category, but I think the trend of more.
More people wanting to get out of big banks, we'll sort of revert to.
<unk>, which is pretty significant interest in that as this year wears on and the reality of a different capital markets environment sets in.
Yeah, Okay, great and if I can just squeeze one more in here.
I know with the prior.
Earnings update you talked about Europe kind of reverting or the hope for that wood after kind of a slower 2021, and you're kind of reiterating that against here today as well.
I'm curious kind of Europe is obviously the others.
Maybe even more uncertainty.
The closer you get to Ukraine.
I'm curious like what the drivers are in Europe right now the idiosyncratic to Greenhill does it feel like it is war.
Is there something specific that you.
You would point to that makes you feel better I guess, maybe just maybe a low bar from last year, but that's just what it is but I'm curious if there's any other color you can provide there.
You know I would say my confidence there as part of the overall outlook for the firm is driven probably more than anything by just a low bar from last year and as you know a certain number of things that have strong strategic.
T J rationales and in and we will get done and so the team over there in all five offices in Europe is actually very busy right now, but I think you would clearly have to say that the better markets in the world for M&A or the U S. And then the ones that are actually helped by higher commodity prices like Australia and Canada.
Europe , clearly, there's gotta be uncertainty with a war on the on the eastern part of Europe .
And the impact on energy prices, there and all of that here in America of course, where we're much more balanced on energy, it's going to cost some companies, but other American companies are going to make a lot of money as a result of that so.
So I think it'll be a better year for us in Europe , but I I think you'd have to be realistic and say that your biggest opportunity. This year is sort of U S, Canada, Australia and in Europe , you just have to make some progress and eventually they'll get past the issues with the war they'll certainly get passed the energy issues.
Things will revert more to the normal over there.
Yes.
It makes sense, okay, well, thanks for the update Scott I appreciate it okay. Thank you Devin.
Ladies and gentlemen, our next question comes from James <unk> with Goldman Sachs. Please go ahead.
Hey, Scott Thanks for taking my questions.
Perhaps you could just contextualize the strength of the restructuring business this quarter.
And to what extent it contributed to results and then what your longer term outlook for the businesses in light of the potentially weakening economic backdrop.
Sure.
I would not say that the year to date, it's been a particularly strong one for restructuring I suspect youll hear that for most of our competitors or maybe an outlier here or there that maybe had some long term deals that kind of came to completion.
In the quarter, maybe walk will still come to completion, but the default rate in the credit market is still very very low. So I think within if I think about that part of our business, which I think of it as both financing and restructuring I think the bigger opportunities on the financing side, you know the direct credit market keeps growing those players.
There are often displacing banks and financings.
For M&A deals are refinancing of existing debt. So I think that's.
That's probably where the bigger opportunity is right now I do think as the year goes on restructuring activity will pick up I don't have much doubt about that given that higher inflation and higher commodity prices higher interest rates tighter credit markets. I mean that has to take companies that are on the margin.
And put them into.
At least fearing a default and needing to do some sort of restructuring of the balance sheet. So so.
So in other words, not not a not a big contributor maybe kind of the pure classic restructuring to the the first half of our year, but probably bigger in the second half and I would suspect much bigger next year.
Okay.
So if I just turn to your non comp expenses they did come in.
Better at least.
I think relative to our expectations on the T&D side, they did come down on the TV side quarter on quarter, how was that particular part of non comp affected by one micron and would you expect that to drive you know the.
Non comp expenses higher over the course of the year if people are traveling more.
I think probably we'll see a little bit more as time goes I mean, clearly we I think we nor anybody else are really back to normal business travel, but it has picked up a fair amount undoubtedly omicron impacted that.
Right around the end of the year and coming out of the holiday period and stuff when when infection rates were still quite high and a lot of places, but we have people flying across the Atlantic now for meetings and people of course flying around the U S and around Europe for meetings. So.
Well you know we've already seen a fair amount of the recovery from.
The pandemic, but undoubtedly we will see a bit more of that in the quarters to come I hope we do.
And then just one last one just about the debt refinancing that you had touched on is there any more color you could just add in terms of whether you would expect to add additional leverage.
The interest rate down or both or sort of any other.
Color around the potential debt refinancing later in the year.
I mean, all we wanted to do is just be opportunistic and take advantage of whatever the right opportunities are.
And obviously the credit markets were wide open until Ukraine invasion, and then they kind of briefly quieted and now we think for companies like ours. It's it's very much open again, so we'll figure out the right moment to do that we will certainly hope for better terms and more flexibility in different ways.
Exactly what amount we refinanced what we'll have to see just depending on where the market is and what we think the opportunity is for.
For for cash at that time, so really no no decision made and we'll just look at the market circumstances on our own circumstances when that when the time comes.
Okay. Thank you so much for taking my questions. Okay. Thanks James.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Our next question comes from Michael Brown with BW. Please go ahead.
Great. Thank you operator.
Hi, Scott how are you.
Good how are you.
Good.
Just a follow up I guess on the on the debt.
Question there.
Most of my other questions have been asked and answered but.
When I'm thinking about the the approach to the debt here it.
It sounds like you guys are kind of pausing, the basically kind of your project debt repayments.
The buybacks here at these at these current valuations.
I understand that but as we are facing.
Using rate environment.
Why not aimed to reduce that net debt more reduced the interest expense burden and and.
Or at least it hasn't bit more of a balance between maybe paying down that debt faster.
And also buying.
Buying back stock here, just curious on your thoughts there sure well, we obviously last year, we did that we've repaid a lot of debt that was kind of our primary focus we are that started after our latest refinancing of $350 million. It's down about 270, so we have repaid.
Quite a lot of that we understand that as you go to refinance from time to time that having.
Enough liquidity in the market <unk> got holders, who can buy and sell.
That that makes it easier to do that so we think it makes sense as we said on our last call a quarter ago to sort of pause with the debt at this level interest expenses not a significant burden for us I mean, it's been a trivial one really on an after tax basis when interest rates were sitting as low as they were for a while it's going to be a bit high.
Now, but still not all that meaningful so we.
We wanted to have a strong balance sheet I feel like we do have a strong balance sheet, but we really want to be opportunistic in terms of what's the best capital structure for the firm at any given moment and I think our shares are at least from our perspective, a very attractive.
Buying opportunity at the moment, so I think the marginal dollar which last year went towards debt repayment and now we have that down to quite a bit lower level that I think this year clearly the marginal dollar goes to buying back stock and we'll be doing that quite quite enthusiastically as long as we're anywhere near where we are right now.
Okay understood.
And just one more for me.
Did not see it in the press release, the managing director headcount apologies, if I, if I missed it or perhaps it's in your presentation, but I didn't see that but can you just let us know where that currently stands.
Sure.
You have it.
In front of you how many Mds are you currently have.
The capital Advisory business and also the restructuring business.
Curious where that currently stands.
Okay.
I've mentioned just on the scrip I think it may have been left out of the press release I can't remember, if we put that in normally or not but we have 80, managing directors, including the two that I've referred to that are that are signed up but not quite here.
Here yet.
In the capital Advisory business, we have.
About nine or 10, managing directors in the financing and restructuring business we have.
About eight fully dedicated kind of real specialist there obviously, they work with all of our sectors specialists and things like that as well.
But.
For the people, who really know the ins and outs of the bankruptcy code and how to restructure that and how to raise new financing it's.
Call it about roughly 10 in that whole area and roughly 10 in the private capital Advisory business and then the other 60, obviously would be pretty much.
But probably a majority of those would be sector focused they do probably think of themselves more as M&A bankers, but when.
Times are tough in whatever sector, they're in they become restructuring bankers and then of course, there are some kind of people who are very much sort of M&A generalists.
And don't specialize by a sector, but play an important execution role in business development role across sectors.
Okay, great. Thanks for that Scott and if you had to say where the hiring is mainly focused on the stage is it is it really on the sector.
M&A generalists.
I would say, yes, particularly this sector Mds and particularly in the U S. So I think those would be the main focus we've added some people.
And that's off to a good.
Good level right now in terms of the capabilities. So the sector specialists, who who have the ability to swing back and forth between M&A and restructuring depending on the economic environment are probably the ones. We're most excited to add near term.
Okay, great. Thank you for taking my questions.
Okay. Thank you and thanks, everybody for dialing in that completes our questions and we look forward to talking to you in next quarter.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines remember wonderful day.
Okay.