Q2 2022 Greenhill & Co Inc Earnings Call
Hello, and welcome to the Greenhill <unk> Company, Inc. Second quarter 2022 earnings call.
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Teleconference over to Patrick Schoenholtz Caisson Holst. Please go ahead.
Thank you.
Good afternoon, and thank you all for joining us today for Greenhill second quarter 2022 financial results Conference call I'm, Patrick soon alts greenhouse 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.
Firms 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've continued to have a high level of client engagement, but in revenue terms had a light second quarter and first half given our relative lack of large transaction completions our revenue for the quarter was $36 million for the first half was $81 5 billion.
Our backlog continues to suggest that this year is likely to play out very much like the three years before it when we had a weak first half followed by a better second half and particularly a strong fourth quarter, resulting in a respectable full year outcome. While many of our competitors have spoken of a more challenging second half environment. Our firm is of a size, where our revenue is not closely tied to the ups and downs of the globe.
The M&A market.
It is noteworthy that in the past three years, we generated 79% more revenue in the second half than we did in the first half and our backlog suggests that other strong finish to 2022.
Meanwhile, we continue to remain disciplined on expenses with our year to date operating cost only slightly higher than last year. If revenue materializes as we expect this should be another year of generating strong cash flow, which we will continue to direct towards share repurchases. So long as our market valuation remains attractive.
As to where we see revenue coming from recent economic and market developments are impacting our expected sources of revenue in varying ways by sector. We expect relatively good performances in consumer energy mining and telecom infrastructure by region, we expect significant improvement in Europe relative to relative to a weak performance last year and we expect the second year a strong performance.
<unk> in Australia, and Canada, given higher commodity prices by type of advice. The restructuring business is relatively quiet given low default rates financing advisory is slower given tighter credit markets, but M&A remains active even if overall global deal activity is well below last year's level.
While our historic focus on M&A advice for public companies is serving US well. This year, we remain committed to the three strategic initiatives I've spoken are frequently in recent quarters first is expanding our coverage of financial sponsors that client type as one that can make use of all of our services from M&A to financing and restructuring to capital raising and secondary sales of fund.
<unk> partner interest we believe we made good progress on this initiative over the past 18 months second as winning more financing advisory roles. This activity is highly complementary to our restructuring advisory business for companies that are in financial distress.
We made some progress in this area last year, but believe that the tremendous growth in the direct lending market creates a very large opportunity worth pursuing.
Third is our private capital advisory business, where in the past 18 months, we have built out a global team to raise primary capital for private funds of many types, including private equity infrastructure credit and others that team is already in the market with a number of high quality fund offerings, and we expect that area to be a significant contributor to perm revenue in years to come.
At the same time, we continue to develop the secondary aspect of this business globally.
Turning to our costs our compensation expense for the quarter was $43 2 million for the first half was $90 million slightly higher than last year, primarily as a result of higher salary levels in our industry.
The year to date compensation ratio was well above normal given our relatively low revenue, but just as we did in the past few years, we expect to bring that ratio down toward our target range for the full year is more revenue materializes in the second half.
Our non compensation costs were up about $1 million in the quarter versus last year, but the year for the year to date or just slightly below last year's level.
Our balance sheet remains in good shape with $64 $5 million in cash at mid year. Despite the fact that most of our revenue should come in second half our term loan balance remains at $271 9 million, it's worth noting that a few years ago, we comfortably carry debt in an amount of $100 million greater than the current level. So obviously, we paid down quite a lot of that debt in the past couple of years.
And we remain committed to a strong credit profile the remaining balance of our loan matures in April 2024, and we aim to refinance that well in advance of maturity most likely in the first half of next year.
During the quarter, we repurchased 851000 shares and share equivalents at an aggregate cost of $10 $4 million year to date, we've repurchased one 9 million shares in chart equivalent at a total cost of $30 2 million, we had $44 6 million, we had $44 $6 million of remaining share repurchase authority.
As of the quarter and we continued to see our shares as significantly undervalued relative to our proven ability to generate strong cash flow in a wide variety of market conditions separately. Our board declared a dividend of <unk> 10 per share consistent with last quarter and closing I note that we added another managing director just this past week. He is a long time.
Swiss banker, who was most recently at Solomon partners. She will focus primarily on telecom infrastructure, one of our key sectors as well as the media clients. We currently have eight managing directors worldwide and we remain focused on recruiting additional talent given the state of the markets and some of the challenges faced by our large bank competitors, we are expecting 2023 to be a big Ricky.
Rooting year for us with that I'm happy to take any questions.
Yes. Thank you.
We will now begin the question and answer session.
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Please hold while we assemble our roster.
And the first question comes from Devin Ryan with JMP Securities.
Hey, good afternoon, Scott and Patrick how are you guys, Hey, Devin good good thanks.
Good.
So Scott in terms of the outlook I mean, it sounds pretty similar I think to probably the same point, we were at last year and the year before in terms of kind of what the first half look like relative to some optimism around the back half obviously, the environment's a lot more challenging today more broadly than probably it was the last couple of years. So there is more uncertainty, but can you make.
Just characterize a little bit more.
Around that optimism for the back half of the year.
Guess, what im trying to figure out is do you have a lot of visibility into.
Kind of what's already been announced and just deals that that should be closing, obviously things can change, but just the deals that are announced the close on their normal schedule and that gets you there or do we still need to see maybe.
The tightening of the bid ask spread from private deals at.
At some point in the back half of the year to be able to.
Can you kind of get to the end result of the <unk>.
Solid year, and a really strong back half.
I think youre right, Devin that where we are.
We're really quite similar to where we were each of the last three years. When we had quite a similar outcome weak first half very strong fourth quarter better third quarter, along the way.
If you go back to 2020, I mean, the world didn't exactly look great in July of 2020, right. We were kind of just getting through the first wave of the pandemic and so on.
Regardless of what the market situation is our economic situation.
By late August 1st.
You kind of know what's going to happen for the year you can be sure not all of the things on your list are going to happen, but but it's not like a lot of new major things are going to come out of the woodwork and go from assignment two announcement to completion.
And sort of under five months, I mean that can happen a little bit but.
But not very often so in other words.
Do have a lot of visibility as you said you never know exactly which ones will close which wanted to get approvals in time, which one will complete as expected in terms of how process plays out but of course, we probability weight everything as we think about our backlog as well. So we tried to factor that in.
But in short we.
I make the comments I make its with a very specific list of.
Key transactions then of course, a very very long list of smaller ones that are factored into that that calculation.
Okay, that's great color, Thanks, Scott and.
And if you can can you give us a little bit more flavor.
Round, the different geographies of the firm and kind of where maybe youre seeing.
This is pick up versus the opposite is it consistent across geographies, where there are anywhere that are kind of.
Alex looking better or worse.
I feel like this year might be more balanced than a lot of recent years happened last year was very quiet for us in Europe and this year, it's not going to be probably a great year in Europe by any stretch, but it is going to be considerably better.
Then it was last year.
Australia, and Canada did well last year I think a lot of that maybe is on the back of increasing commodity prices, which helps those economies more than it does most others. So.
The business is quite good in both of those and in the U S. There's really there's not a lot of great pockets of huge strength or a great weakness I mean, it's kind of a I think it's a year when we're going to see fairly broad participation across our regions and across our.
Our sectors, but but obviously with the with.
With the normal variations within offices are within teams are selling this to people, who really had quite a strong year and others less so.
Yes got it okay. If I could just squeeze one more quick one in on the buybacks. So you hear you loud and clear on the share price and kind of how you guys are thinking about it.
How should we think about capacity for.
Buybacks, particularly related to expectations that you should have a much better second half than first half. So you bought back 850000 shares in the second quarter, but is the thought process if the stock were.
Similar ballpark that you are kind of capacity build pretty materially into the back half or anything else. You can share I know you don't want to completely give away the intentions here, but just love any more perspective on how youre thinking about the ability to buy back stock.
Look we're always trying to strike a balance as I alluded to in my in my written remarks between maintaining a strong credit profile and buying back shares Opportunistically whenever you think that share prices is attractive so.
If the rest of the year plays out as we expect it will.
And hopefully there is some credibility that comes from the fact that we've made similar pronouncements three years in a row and it didn't it did play out that way.
We will have significant capacity relative to the ability to even buy back shares as you know there are limitations on daily buying and things like that so there's kind of a limit to what you can get done, but I think our ability to go into the market and do that.
No.
The year plays out as hoped as it should be it should not be a problem.
Yeah, Okay terrific I'll leave it there. Thanks, so much Scott Okay. Thanks, Kevin.
Thank you and the next question comes from Michael Brown with <unk>.
Yes.
Great Hi, Scott, Patrick Hey, Michael.
So I guess I'm, just trying to dig in a little on your guidance on the second half here and so if you.
If you could maybe put a finer point on that.
Are you is it fair to expect profitability here in the second half I know you don't have great visibility, but I guess im trying to think about is in.
In each of the prior three years that you referenced youre actually able to get to full year profitability.
Obviously market conditions could could certainly.
Impact how that plays out here into the second half but.
What are your thoughts on maybe that full year profitability or even narrowing in on just the second half and how you're thinking about profitability there.
Yes.
I'm not sure I can be much more specific than to say that the way it looks to us sitting looking at our pipeline of announced deals and deals that are kind of behind the scenes with nearing announcement and so on that it looks very much like the last three years and you can look at those three years and those three years when.
<unk> had a pretty weak performance in the first half really quite substantial.
Poor performance and profitability in the second half and netted out to a good place all three of those years there are no guarantees in life.
Said in answer to prior question.
No until a deal is closed that its going to close but based on past experience we are expecting.
And evolution of the of the year to be very similar to the past III.
Okay, and then I was just looking at your cash levels and that looks like it's the lowest it's been since 2017, when the leverage recap began.
I just wanted to check how.
Low 10 that comfortably run and do you think this is probably the trough.
For the year and I guess I'd, just I suppose I still struggle with the question why not pay down the debt faster just given the rising rate environment now versus versus doing the share buybacks.
Well as I.
I was saying earlier, we want to strike a balance between maintaining a strong credit profile, which certainly we think we have we paid down more than $100 million of debt from our recapitalization transaction, our refinancing of that two or three years ago. So that's a lot of debt paydown.
But at the same time look we want to do what's what's good for our shareholders on one was the stock is at a level, where we think it's really undervalued, we are going to buyback.
Stock so we're striking a balance between those two and I think our.
Our balance sheets in reasonable shape with far less debt than what we had one rates were a lot lower.
And at this moment I think you can tip the balance more towards buying back shares.
The share price goes higher or our view changes on the debt, we will flip the dial back toward toward more debt repayment, but I think we're I think for us in our view, we're striking the right balance between those two right now.
Okay understood.
Leave it there thanks, Scott Okay. Thanks, Michael.
Thank you and the next question comes from James <unk> with Goldman Sachs.
Hi, Scott Thanks for taking my questions just quickly on the.
The comp ratio here. So as a result of your fixed junior banker comp in guarantees for the hires made recently, maybe you could just help us think about what the absolute level of fixed costs are on a quarterly basis, just to help us model the comp ratio.
That's probably too detailed a question for me to try to answer off the top of my head I think.
If you look at how our and the minimum is not somebody is that relevant anyway, you need to you need to be competitive in terms of compensation and certainly we have been in recent years and intend to be going forward as well. So I mean, the comp ratio certainly is out of whack relative to where we would like it would be for the year to date, but the same thing was true in the three prior years.
And each of those cases, we got back to and are right around our target range and that's absolutely our objective for the second half of this year as well.
Okay that makes a lot of sense and the other one that I just wanted to ask about is on the non comp side, how normalized as the level you're at this quarter.
And do you expect the impact of <unk>.
More travel for senior bankers to put upward pressure on the non comp expense from here in the back half.
I don't expect a lot of pressure on that certainly not in the back half I don't think theyre going to mean.
Travel has picked up certainly in our even in our second quarter already I don't expect it to maybe move a lot more in the very near term and there were some other noise within the non comp I mean, it wasn't that long ago. We were building out of New York, New York headquarters and therefore carried two lease costs for some period of time right now we're doing that in London, where we're building out.
<unk> new space so.
Our non comp frankly, this year is even a little bit elevated relative to what it would be in kind of a normal run rate basis. So.
So I would expect next year's non comp number to be very similar to this year's.
As we grow and as travel returns fully to normal, which probably will never be back to what it was in 2019 now it may tick up a little bit from there, but I don't expect a lot of near term pressure.
Great. Thanks for taking my questions.
Thank you.
That's our last question. So thank you all for joining and we look forward to speaking to you again next quarter.
Thank you.
This does conclude today's teleconference. Thank you for attending today's presentation.
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