Q3 2022 Greenhill & Co Inc Earnings Call

Okay.

Good day and welcome to the Greenhill third quarter 2022 earnings call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.

I'd like to turn the conference over to Patrick Soon holds director of Investor Relations. Please go ahead.

Thank you good afternoon, and thank you all for joining us today for Greenhill third 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 quarterly reports on Form 10-Q, and current reports on form 8-K.

Either 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.

Patrick our firm produced solid third quarter results consistent with our commentary on last couple of earnings calls. Despite what was obviously a difficult transaction environment. Our revenue for the quarter was $81 1 million for the year to date was $162 6 million as I said last quarter. Our firm is of a size, where our revenue is not necessarily closely.

Tied to the ups and downs of the global M&A market and this year for random reasons all of our largest fees look set to land in the last three to four months of the year as a result, despite unfavorable credit and equity markets our expectations of a strong second half in a respectable full year revenue outcome remain in place. Meanwhile, we continue to remain disciplined on expenses and our year to date operating.

Expenses are almost identical to those of last year.

If revenue continues to materialize as we expect this should be another year of solid cash flow generation for the firm.

As to where we see revenue coming from we have seen a particularly strong level of activity in industrial and telecom infrastructure with most other sectors also set to make a reasonable contribution by region. We are seeing an improved contribution from Europe and a second year of strong performances in Australia, and Canada, given the higher commodity prices that benefit those markets.

In total it looks like about 40% of our revenue this year will come from clients based outside the U S, which is about average for us in recent years and positive in the face of very weak currencies outside the U S.

By type of advice, our M&A business will be the dominant producer this year, but we have recently seen restructuring activity start to ramp up fairly quickly given challenging credit markets looked.

Looking ahead to next year, we expect to see a substantial increase in restructuring activity and related revenue. In addition business conditions for M&A should continue to be favorable in Australia, and Canada and in the U S. We believe the well capitalized public companies that have always constituted a large part of our client base. We will also continue to be active in strategic M&A.

Lastly, we expect the recent buildup of our private capital advisory team to pay significant dividends next year in terms of increased fees for primary fund raising as well as secondary transactions.

Apart from our day to day work of winning and executing assignments in all areas. We continue to focus on the three strategic initiatives of which I have frequently spoken one is expanding our coverage of financial sponsors to supplement our historic public company client base second is developing our business of advising on financing transactions and the third is expanding our private capital.

<unk> business focused on raising money for various types of private equity funds and handling sale transactions for investors in those funds.

Apart from those particular initiatives, we aimed to increase our scale in most areas of our business and in that regard we expect a strong recruiting year in 2023, given the challenges that investment banking groups at the large banks are facing.

We have many active recruiting dialogues in progress right now.

Turning to our costs our compensation expense for the quarter was $45 3 million for the year to date was $135 $3 million in both cases very similar to last year.

We brought our compensation ratio for the year lower than the third quarter and we aim to do the same in the fourth quarter consistent with what we have done in the past few years.

Our non compensation costs were $12 9 million for the quarter and $39 8 million for the year to date, a bit lower than last year, despite increasing travel expenses and carrying to London leases, while we build out some new space there.

Our balance sheet at quarter end remained in good shape with $64 $3 million in cash and significantly increased receivables as our pipeline continues to come to fruition, we were up to a cash balance of $85 $7 million by the end of October our term loan balance remains at $271 $9 million and the remaining balance of our loan matures.

In April 2024, we will look to optimize the timing of our refinancing in coming months relative to two factors. One is our improving operating performance and getting investors to recognize that and two was the evolution of credit Mark credit market conditions to a more favorable place.

Our board declared a dividend of <unk> 10 cents a share consistent with last quarter.

During the quarter, we repurchased only a token amount of share equivalents in connection with the restricted stock that vested essentially we were pausing to be sure that our revenue expectations, which were well ahead of market expectations would come to fruition.

Once that was certain we recently re entered the market for share repurchases.

As of October 31, we had $43 $3 million of share repurchase authority remaining.

Given the regulatory limitations around share repurchases, we won't get to nearly the full use of that authorization. This calendar year, but we will do what we can as we continue to see our shares as highly undervalued. Our stock was at $20 not long before Ukraine was invaded in market sentiment turned negative.

Significant factor in its decline. This year is the fact that by a very narrow margin in the spring we slipped out of the primary small cap stocks indexes.

One firm that covers our stock put out a research piece, saying that the average stock across all sectors that fall under those indexes underperformed by 50%, obviously that is particularly painful on the downside stock market like we are experiencing this year, but on the other hand, if we perform as we expect to do we ought to be able to find our way back into those indexes and retrace much of the groundwork.

<unk>. This year that is our objective and we know that the first step toward that objective is delivering solid financial results well ahead of expectations. As we are today importantly, we believe we are well positioned to do that again next quarter and into next year and with that I'm happy 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.

To withdraw your question. Please press Star then two.

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

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

Hey, good afternoon, Scott and Patrick how are you.

Good.

Great. So I guess first off if you can tell us how much revenue.

Fell into <unk> from the first week or so <unk> that would be helpful and then.

It sounds like Scott your full year outlook.

Similar to kind of what we heard a few months ago I know markets have been volatile.

Equity prices and risk assets, along that point, but is that the right I guess takeaway and then just with some of the recent maybe improvement in risk assets. In recent weeks. Even are you seeing any improvement in M&A conditions relative to where we've been or I'm, just curious kind of what things feel like at the very moment today.

Relative to what's been obviously, a very difficult year for the industry.

Sure.

On your first question to be Frank we don't calculate what our revenue would have been under different accounting that was I think went out of out of practice four or five years ago. So so I can't really really answer that.

We in terms of outlook, though I would say, yes our.

Expectations for the year are really pretty much unchanged from three or six months ago, We had a certain group of things in the pipeline that we're progressing along.

We don't typically get involved in too many sort of highly leveraged high risk situations of the kind that might have fallen out of bed in a tougher credit market. So most of our things seem to have been progressing through Q3, and I think we will are continuing to progress through through Q4, So our outlook for the year is really not.

Not much different than it was three or six months ago of course, where exactly you come out is just going to depend on.

The final timing at the end of the year in which deals fall into this year and would fall into next year.

As for the third part of your question about what has anything changed even in very very recent weeks.

I would say not I mean, I think we were hopeful that we're setting up for a year and next year when restructuring will be quite active after having been very very quiet for a lot of 2022, because the default rate was so low.

So we're hopeful restructuring will be quite active but we're also hopeful that M&A will be quite active and we feel like while some companies of course, we will struggle in AR.

What may be a recessionary environment and many other companies, particularly the better capitalized public companies that make up a lot of our client base I don't think we'll be dissuaded from from doing M&A. So we're hopeful that we got a little bit of a goldilocks scenario, where both our M&A and our restructuring teams can can stay very very active.

The year ahead.

Okay.

Okay, great. Thanks, Scott and I guess the follow up there is obviously I guess.

In that outlook.

That would imply the greenhill price have to have.

Better year than most of the public peers and maybe at the very upper end of the range and so kind of contrasting that against the stock price that you talked about so just thinking about kind of capacity for buybacks in the balance that you talked about and obviously I know what you want to do on the debt side.

It sounds like cash balances are up from quarter end I think you said $87 million. So just like how we should think about capacity you still to pay bonuses and have some dry powder and be balanced so any kind of thoughts around how active you could be just to take advantage of.

Low price relative to what sounds like maybe a more constructive outlook that's being reflected.

Yes, I would agree that.

For us this looks like it could be in comparison versus last year, a better year than for most other firms that we didn't have the huge increase last year, our business just tends to be more steady year to year frankly, so we didn't get the big.

Run up last year, but it doesn't look like we're going to get a big decline this year like like some firms may may.

May see as for buybacks I think really the relevant limitation is just going to be the regulations around how much you can buy back based on daily trading volume and buying on.

Downtick and things like that so.

We feel.

We feel like we've got the capacity to buy all the shares that were allowed to buy but there is.

Frankly, there is a limit to how much that is obviously it can change a little bit of volume picks up which are which would be great.

So I would expect we'll we'll be in the market buying back shares but.

Again at the current share price and with the training volume there will be a limit to how much. We can we can actually buy them before before we before we speak again three months from now.

Yeah, Okay terrific I'll leave it there. Thanks, so much guys. Okay. Thanks, Kevin.

As a reminder, if you have a question. Please press Star then one.

Our next question comes from Mike Braun from <unk>. Please go ahead.

Great Hi, Scott and Patrick.

Hello.

So I wanted to to narrow in on the comp.

Top line here, so I know comp ratio is always a bit of a moving target, but if we focus on the on the comp dollars just as you think about the fourth quarter here.

<unk>.

That's the right way to think about what.

Yeah.

It's kind of right run rate for the fourth quarter as we think about our full year comp expense and then maybe in the fourth quarter comes in better then obviously the.

Comp expense flex up from there, but do you think <unk> is a good base to work from when we think about modeling op expense here.

I'm not sure I can help you too much on that it really is a function of revenue I mean, if you look at our results. The last couple of years, where we had particularly strong fourth quarter. As we ended up with a very low quarterly comp ratio as we worked towards getting to the what we felt was the right full year comp ratio. So.

At the at the higher end of revenue possibilities.

To be a lower comp ratio as we've tried to work toward a.

Target for the full year that we like.

At a lower end of revenue outcomes.

We're going to we're going to have less ability to do that so we're just going to have to see how things play out, but we took the year to date comp ratio down some in the third quarter.

Our hope and expectation and certainly what we did the last couple of years is to take it down meaningfully further in the fourth quarter exactly how much further we can will just depend on where the revenue ultimately comes out.

Okay, great and on the restructuring side.

It sounds like Youre, certainly expecting a better 2023 as activity there.

<unk> to ramp up can you can you just expand on a little bit of what you're seeing at the moment right now in terms of how the mandates are progressing and then if you would.

Understanding I have a crystal ball here, but if you think about next year in terms of when the <unk>.

Revenue production from that segment starts to pick up is it probably more second half weighted or do we.

Start to see some of that flowing through in the first half.

I think.

First of all for much of 2022, there really was a very very low default rate given the credit markets were so strong and so there was a very low level of restructuring activity. We have just in recent weeks last few months, maybe started to see the number of opportunities that were invited to pitch for.

Or just win based on our relationship is really starting to trend up so.

I think we'll see we've already seen a meaningful uptick in monthly retainers, we expect there'll be more of that by year end, but realistically if youre asking when do you think.

The sort of success fees the larger completion fees start to fall, yes, that's probably more like a second half phenomenon.

<unk> phenomenon next year, the first half with hopefully much more in terms of multi retainers, but and certainly some success fees on transactions that are quicker, but when youre talking about things like going through bankruptcy and so on that takes time and so it's probably more of a second half phenomenon, where that will really kick in.

Okay, great. Thanks for taking my questions Scott Okay. Thank you.

Again, if you're a question. Please press Star then one.

And the next question comes from Janney <unk> from Goldman Sachs. Please go ahead.

Thanks, It's James.

Thanks for taking my question Scott, maybe if we could just touch on the rates backdrop I really have two questions here. The first is there an absolute level of rates that you think would.

Prevent some of the M&A activity, particularly on the sponsor side from from occurring.

Or do you think the market's just gotten to a place where they've digested the higher rate environment, and then as a sort of corollary given your international exposure in your European SKU is the strong dollar is something thats catalyzing activity on the continent at all.

Both good questions.

I think the market can handle higher rates the M&A market that can handle higher rates to where they are and where they're likely to go I think it's more an issue of credit availability that will drive.

How much sponsor M&A theres going to be.

<unk> seen a couple of deals we think we'll see others, including somewhere in.

Involved and that'll be a meaningful size, but I think in the near term financial sponsors are going to have to overact, what ties a lot of deals and maybe look to refinance them with more debt later.

Or they're going to have to go out and find the debt and sort of unconventional places, perhaps too to to help them get transactions done so.

I'm more optimistic about sort of public company M&A than I am about sponsor M&A, but I do think there will be determined sponsors who will still get through creative means get get transactions done.

On the dollar that's I'm glad you raised that because we actually think that could be a significant driver is that if you look at.

Where the pound is where the euro is where the Australian dollar is that we actually do think there will be a fair amount of <unk>.

Acquisition activity, particularly from the U S. Maybe also some take privates within those markets.

That'll be driven by the fact that we really have kind of the cheapest currencies on the generation in many cases and that that between that and kind of our U S public companies and some of the markets that are smaller, but but I think still well positioned like Canada, and Australia, where we're <unk>.

Currently optimistic about I'm going to think it's going to be a record year or something like that like last year was for overall M&A activity, but we feel like 2023 could hold up pretty well and if you add to that a much much increased restructuring activity.

There are some reasons for.

For lack of pessimism, if not even some optimism for next year.

Understood that's really clear I just wanted to touch on some of the.

Just your plans around.

The debt.

And in terms of.

<unk> to restructure that or refinance that and then how youre thinking about paying down the debt from here you, obviously have a flat cash balance quarter on quarter, obviously, a pretty small buyback, but how do you think about juxtaposing the buybacks versus.

The maturity is coming closer in 2024 for that debt.

While we still have 18 months left on the debt and so what we wanted to do which I think we did very effectively for our original financing and then for the refinancing we did have that we really want to optimize our timing to get the best terms, we can and that's both in terms of rate, but also importantly in terms of flexibility and your ability to use cash flow for things like dividends and buybacks. So we're not in a.

Huge hurry to get something done we'd rather get something done that's the right outcome for us So we will be monitoring credit conditions.

Mostly but the other factor as I noted in my remarks is really our own performance.

Market expectations were very low for us this quarter and including a loss instead, we have a significant profit we're obviously.

Continue to be quite helpful for how the full year will turn out for us and so we think number one getting the market perspective sort of more in line with our own internal view as to what our performance looks like and then number two at some point in here, we think credit market conditions will stabilize and even improve them and they always do eventually.

And if we can get the stars to align on those two things stronger performance, a more accurate view of that performance and.

A bit better conditions.

The moment, we will seize unfortunately in the world of refinancing, especially if you've been.

Multi time issue. We're like we have when you are ready to pull the trigger you can move very very quickly. So we.

We don't need a huge amount of pre planning for that we're just going to watch closely and grabbed the optimal time when it comes.

Very clear thank you so much.

Okay. Thank you James.

Thank you all for dialing in and I think that's our last question and we look forward to speaking to you again in a few months.

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

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Yes.

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