Q4 2022 Greenhill & Co Inc Earnings Call
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Good day, everyone and welcome to the Greenhill fourth quarter and full year 2022 earnings conference call.
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At this time I'd like to turn the floor over to you Patrick soon holes. Sir. Please go ahead.
Thank you.
Good afternoon, and thank you all for joining us today for greenhouse fourth quarter 2022 financial results Conference call I'm, Patrick Stonewalled, Screenhouse head of Investor Relations and 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.
The 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.
Thank you Patrick our revenue was $95 $8 million for the fourth quarter and $258 $5 million for the year and our earnings per share was <unk> 95 cents for the quarter and <unk> 15 cents for the year.
Consistent with my commentary on the last couple of quarterly calls our largest fees for 2022, all landed late in the year and as a result, our second half revenue was more than double that of our first half yet our revenue outcome fell short of our even higher expectations of the slower pace of deal completions met many more transaction processes carried over into the new year than we have than we expected.
In recent years, we've seen particularly strong transaction completions in our fourth quarters, such that our backlog was somewhat depleted at the start of the next year, resulting in a weak first half revenue between the projects we carried into 2023 expectations for an improving operating environment as interest rate hikes wind down and the likelihood of improved advisory activity and.
Truck sharing as well as M&A, we expect a considerably stronger first half and we've seen the last few years as well as a return to higher revenue and more typical profit margins for the full year ahead.
Literally the market environment today remains challenging, but our predominantly public company client base remains ready willing and able to pursue strategic opportunities and we are less reliant than many of our peers on financial sponsors the technology sector or other areas that have been most impacted by recent market conditions.
With respect to our 2022 revenue came from the key sectors, where industrial and telecom infrastructure those sector should remain active and we expect to see increased activity in energy health care mining and other sectors. In the year ahead. We saw good diversity of 2022 revenue in a geographic sense with Canada, France, and Spain, all important contributors.
Australia made a solid contribution and carried a strong backlog into the new year.
It is worth noting that our 2022 revenue was negatively impacted by the fact that non dollar currencies have been unusually weak, particularly in the second half of the year when many of our larger overseas fees were booked already there has been a meaningful recovery in those currencies and if the dollar declines further we will further benefit as overseas fees translate into more dollar revenue by.
Type of advice, we saw less financing and restructuring work in 2022, but expect both of those areas to be more active in the year ahead, given relatively weak economic conditions and challenging credit markets.
And our private capital Advisory business, we've been in building mode. The last couple of years, but we entered 2023, one that with an attractive backlog of primary fundraising assignments and our secondary transaction business has remained active globally.
We continue to focus on our key strategic initiative of expanding our coverage of financial sponsors to supplement our historic public company client base sponsors are able to use every service we provide from M&A to financing restructuring and fundraising and expanding our financing advisory business principally to help sponsors as well as other clients access the direct let.
The market remains the key objective as well.
Across our businesses, we are aiming for 'twenty two 'twenty three to be a significant recruiting year, we announced one new managing director recruit today and we are in dialogue with many interesting potential recruits principally in the U S market across key sectors, where we want to expand.
We also continue to develop our own talent as evidenced by the four managing director promotions referenced in our press release.
Turning to our costs, our compensation expense for the quarter was $44 $444 $5 million and for the year to date was $179 $8 million.
Quarterly and annual figures were both lower than last year in absolute terms, but the resulting compensation ratio was higher than normal given our revenue outcome.
An important objective for 2023 is to bring our compensation ratio back down to our target range, our non compensation costs were $18 $3 million for the quarter and $58 $1 million for the year a bit higher than last year, given a loss on foreign currency movements, a somewhat unusual professional fee paid to a co adviser increased travel expenses.
And carrying to London leases, while we built out some new space there.
Looking ahead to 2023, we should not incurred the kind of duplicative rent. We have had the last few years as we built out new locations for our two largest offices, we likewise do not expect to see the other various unusual items again.
Our balance sheet at yearend remained in good shape with $104 $3 million in cash our term loan balance remains at $271 $9 million or loan matures in April 2024, and so we will look to optimize the timing of refinancing in coming months in the next quarter or two we expect the trailing four quarter metrics.
The credit markets focus on well have moved to a much improved place and we are hopeful that credit market conditions will have continued to evolve to a more favorable place by then too. So that we can achieve highly attractive terms just as we did in our two prior financings.
We expect to deleverage significantly over the next few years, starting in 2023, given that the cost of our dividend is modest and the liquidity of our stock as such the potential for further significant share repurchases is limited during.
During the fourth quarter, we repurchased a little over a million shares and share equivalents for a cost of about $9 $5 million and for the year, we've repurchased almost 3 million shares for a cost of about $40 million for 2023 through next January our board authorized the repurchase of an additional $30 million of stock in soccer equivalents, which should be largely.
To offset equity grants to employees. Our board also declared a quarterly dividend of <unk> 10 per share consistent with recent quarters.
This is a good place to note that in our press release, we speak of a transition in our CFO position Hal Rodriguez will after more than 20 years with us shortly move to a part time advisory position as he prepares for retirement and Mark Laskey will step into his CFO role Mark has been with US for 10 years and before that spent 12 years in finance roles at Goldman Sachs. So he is.
Well prepared for this role and how we will continue to be around to help as needed.
I will close with a brief note that our stock performance in 2022 was heavily impacted by the fact that by a very narrow margin in the spring we slipped out of the primary small cap indexes based on our current market capitalization and the current metrics for those indexes. We are on track to be readmitted in 2023, and a strong start to this year would obviously make that even more.
More likely with that I'm happy to take any questions.
Ladies and gentlemen at this time, we will begin the question and answer session. Once again to ask a question you May Press Star and then one you are using a speaker phone. We do ask that you. Please pick up the handset prior to pressing the keys to ensure the best sound quality.
So with your all your questions you May press star and she.
Once again that is star then one to join the question queue.
Okay.
Our first question today comes from Devin Ryan from JMP Securities. Please go ahead with your questions.
Hey, good afternoon, Scott and Patrick how are you guys.
How are you Devin.
Doing well.
Maybe starting on Scott your comments just for an expectation for improving operating.
Drop for 2023.
I guess, what are you seeing in the environment or any signs that maybe making you feel better about this year starting relative to 2022 I appreciate you coming into the year with a better backlog, but what youre seeing to make you feel better to surround the tone of activity and then if you can just even a little bit of kind of geographic perspective around that.
That would be helpful. Thanks, Okay sure. Good good good questions look I'd put it this way we felt like we were quite busy in the latter half of last year. The only kind of constraint. We felt like we had against this was things just sort of taking longer to get done than perhaps they normally do.
So it's there's not a feeling that any of the things we perhaps thought at one point, we're going to close in December .
Have died it's really just things are taking a bit longer to get done. So so that's an encouraging sign look I'd also say that that you know.
Whereas a year ago, I think everybody was incredibly optimistic right that was before the Ukraine invasion, and higher inflation and interest rates and all the rest.
If you look at where we are now.
It probably very recently I sort of peak pessimism Ah in some centers in the market, but clearly you know rates are now starting to come down on the long end inflation starting to come down and you know the companies we talk to look they're going to still be cautious they know that it's going to be a challenging operating environment for them are in there.
And businesses through 2023, but I feel like people can now see the other side they can see it peaking in and and the fed's interest rate hikes, and and and I think there is an increasing sense that to the extent there is in a recession, it's not going to be a long one or a deep one. So you know frankly, I think it could turn out to be in some way is the opposite of last year.
I mean last year the market was very very optimistic in January and it turned out to be a very difficult year. This year. The market was probably very very pessimistic in January and and it could be the year of a bounce back.
Great.
Just on capital.
Return and deployment so I appreciate that.
This year is more on debt paydown.
That makes sense, but you still have a relatively large repurchase authorization. So I guess.
Like is there any way to to add some context around.
Do you have the ability to return capital through buybacks and maybe what would shift that interest maybe more towards buybacks is just a lower stock price or are you pretty set on the debt pay down.
I think where we where we are really the focus on the refocus kind of on debt pay down is more a function of the constraints on buying back shares than it is on the desire to buy back shares. So as you. All know there are trading volume limitations on how any company can buy back shares and we frankly bought back so many.
That we're now finding there's you know there's a pretty.
Limited amount left that we can buy at any given time, so when we throw out as the as the new authorization for kind of the next 12 months.
Up $30 million, we think that's going to be not only about offset.
Any shares that are vesting for employees, but you know.
At least as important we think that's about all we'd be able to do anyway.
So what we're saying is it dividend in absolute dollar cost is quite modest.
Share repurchase we've kind of pushed out about as far as we can at least for now.
You know, obviously, if liquidity picks up and trading volume picks up and the share price picks up then obviously you can you will have the ability to buy back more but as we sit here today.
We kind of come by default to thinking that what we should focus on in the next year or two as is deleveraging.
Yeah, Okay. Good color just last one.
Just thinking about kind of growth opportunity. If you can just maybe give us a couple of maybe the biggest priorities as you look at your business today, where you feel like you really want to lean in investment or what are you. Most excited about the ability to grow over the next couple of years.
Sure I think it's our focus I mean, we have a lot of recruiting dialogues going right now I mean, it's a good it's a good market for recruiting talent and I and I don't mean people lost their jobs on wall Street, but people who are.
Who who are just yeah, you know I've been through a tough year wherever they are and are considering a move most often from our big bank to a firm like ours.
Our main focus is definitely the U S. It you know I didn't answer your question actually earlier you asked the second part of your question about geographic focus we would probably see the most near term upside in the U S. Although I think the commodity focused markets of Australia and Canada. We are also quite positive on for the year ahead.
And given that and given the fact that the U S market has proven really more resilience in the other markets in recent years.
Our recruiting will be I think mostly focused in the U S. I think it'll be mostly focused on M&A and mostly in people, who add to our industry sector capabilities and in that regard probably our biggest gaps in terms of you know where we have the most white space I would say, our healthcare and TMT.
But I would also say that the industrial space, which has been a really good one for us in the areas, where the most built out already.
Just kind of given the strength we have in that sector that there are some additional sub sectors that we're not in today are that we should pursue because it kind of fills out the industrial portfolio in terms of of coverage. So that that's kind of how we are focusing our recruiting efforts today.
Okay, great. Thanks, Scott appreciate it I'll leave it there.
Thank you.
Yeah.
And our next question comes from Matt <unk> from <unk>. Please go ahead with your questions.
Hi, Good afternoon. Thank you for taking my questions sure.
So just looking at <unk>.
Quarterly comps.
Over the course of the year on compensation specifically.
It looked like the the nominal amount it was relatively stable and consistent over the course of the year.
I appreciate that obviously this will be dependent upon the revenue environment, but should we think about that.
Orderly run rate kind of in the.
Low to mid $40 million range on a quarterly basis being a decent floor as it relates to compensation as we look to the first several quarters of 2023.
You know I wouldn't want to be too specific on that because as you said compensation really is a function of revenue and secondly, I would throw out that it's also to some degree a function of recruiting and you know the higher the revenue is the higher comp will be the more successful.
First of all we are in and doing a lot of recruiting and again last year was a relatively quiet year for us in recruiting we made some really important recruits, but not as long a list as normal.
Obviously, there are some costs that goes with that as well, but you know I I would take our our history, including this year is a bit of a guide, but obviously in terms of absolute numbers, but clearly we.
We want to both increase the revenue by quite a lot and we want to see our comp ratio go back to its target range. So you know I think that's really about all I can all the guidance I can give on that right now.
Okay great.
And then in your prepared remarks, and I think in the press releases you cited delays.
I guess towards the end of the year.
In terms of elongated timelines OBO closure.
Is there any kind of common thread through line that drove those delays and pushed back and isn't it fair to assume from your comments that we still.
We anticipate these deals are closed relatively soon.
And kind of into the into the first half of 2023, just kind of curious on on both the factories and the expected timing of those elongated timelines. Okay. Good. Good. Good question look the factors I think in the end and what is obviously a very volatile market is a little bit of everything I mean, I think regulators are.
Not succeeding in blocking a lot of deals, but they certainly I think around the world have been a little bit slower to sort of approve deals and let them flow through so that's one factor I think you know the difficulty of getting financing is going to slow down some deals, but you know if you are creative and determined companies and sponsors are fine.
Ways to get things done.
And then just the incredible volatility in markets, whether its currencies, which we have been extraordinarily volatile or or.
The stock market as you know it makes them more complicated to sort of have that final negotiation and set a price and get people to sign the contract. So I think all of those are factors in and things, taking a bit longer than usual to get done towards the towards the latter part of last year, but.
Yeah look I'm encouraged by the fact that I don't feel like really anything we were working on towards the anything of significance as we working on towards the end of the year died I think it's just a matter of things taking a bit longer to get to the finish line then than we probably would've guessed and in the fall.
Got it and then last one for me just more of a clarifying question as it relates to the non comp side.
It sounds like you had some one offs in there that.
You did highlight as it relates to the build out of the London office as wallets.
Sounds like a co advisory fee in there as well just curious if you could quantify any of those impacts as it relates to the 2022 non comp base that you don't really expect to recur in 2023 as we looked at our models.
I mean, what what I would say for non comp for your modeling purposes, I think in our Investor presentation. We continue to show our target I think $55 million to $60 million, which is what it has been and we did fall in that range. This year end and we the reason we didn't change that I mean, clearly we think a lot of a bunch of these kind of.
One offs won't happen again, certainly, but won't have duplicative rent of a major office again for a while having had just had that.
We think that.
That there'll clearly be more travel.
M&A activity picks up and that's all going to kind of net out to a number probably very similar in 2023 to what we had in 2022 and 2021 for that matter. It's been we manage those costs pretty well we've had some one offs there.
Where may be offset by less travel now the travels coming back in some of the one offs are going away. So we were kind of in a.
And a total non comp cost basis, we've been pretty much treading water for a while which is which I think is a good is a positive thing.
Okay, great. Thanks, guys.
Alright, thank you.
Our next question comes from James <unk> from Goldman Sachs. Please go ahead with your question.
Hey, Scott Thanks for taking my questions.
Maybe if we could just start on the strategic versus sponsor a dichotomy.
Maybe you could just weigh up the strength of the dialog across those two different groups of buyers and the differences between them.
Sure I think clearly we're still in a market.
Where strategics or the more active group, obviously a lot of them are investment grade a lot of them have strong balance sheets, a lot of them have a fair amount of cash resources. So they are able to act and frankly right now they are probably seeing less competition from the financial sponsor role then they might ordinarily so we're more optimistic near term.
About <unk> about that.
I'd say medium term, though we remain very very focused on growing our financial sponsor business for the simple reason that they that that group still has an extraordinary amount of dry powder.
They haven't put a lot of it to work just recently they would like to see credit markets get a bit better before they.
It really amp up that spending and when that happens I am sure they will amp up that spending.
But right now we're a little more optimistic on the strategic side and frankly, that's obviously near term a positive for us because we have historically been affirmative skews more to that client base than to the sponsor basically even even though one of our objectives is to start to balance those two out a little bit more.
Okay that makes sense.
Maybe if you could just contextualize the strength.
Of your restructuring business in the past quarter and what you see ahead.
And then perhaps within the restructuring business what parts are.
Are you seeing strength in the debtor side creditor side traditional structuring or liability management.
Okay. Good that's a good question actually because last year wasn't unusually quiet year.
For us in restructuring, obviously, it was a difficult financing environment, but yet for most of the year.
Credit markets were really quite good.
And there were a very low default rate I'm sure you've seen statistics on that and so there was just frankly very little activity. Although we didn't do any but it was not in a really exciting part of our business last year I would say towards the end of the year. We started seeing a significant pickup in opportunities I would say that most of the activity is in what I.
I would call like classic restructuring like companies that are in some degree of distress not necessarily chapter 11 style, but some.
To some degree of distress and.
Bye bye sector I think it's pretty eclectic you know we're still in an economy, where I think corporate profits are quite good in most places, but there are pockets of companies out there that are exposed to higher commodity prices are higher interest rates, our foreign currency movements and so it's kind of an eclectic mix of opera.
<unk> I would say, there's not a lot of household names that are out there.
Doing restructuring right now, but there is a you know.
A big World of mid cap opportunities and we're seeing more of those come our way.
Okay, that's clear.
Just a follow up there you talked a little bit about the credit markets being opened at the beginning of last year and that Oh.
Slowing or keeping the lid on restructuring opportunities.
Obviously, we've seen those markets open up a little bit through the beginning of this year. So is that a potential headwind for the restructuring business and I recognize your M&A business is far larger than restructuring. So that's probably a positive but just how do we think about the impact on the restructuring business.
Ensign markets continue to.
<unk>.
Yeah look I think financing markets I do expect frankly that they will continue to improve but I mean, they've got a long way to go to get back to being kind of available for everybody. So I think credit markets will be discerning, what I would call a discerning for.
For a good while and I think there'll be more.
Sponsors and companies that that would be able to get financing, but theyre going to be many that that won't be able to I mean, certainly you look at how quiet the leveraged loan market has been I mean that will that is starting to open but it's opening not to everybody. So I think frankly, my expectation and of course my hope for 2023 is I think there were.
Will be considerably more restructuring type opportunities than there were in 2022, but I also think we're gonna have a better M&A market off a relatively low base and you know obviously that would be the goldilocks scenario for us in many of our peers and I think if you just look at the way the markets are evolving I think that's a real possibility.
Okay. Thanks for taking my questions.
Thank you and that was our last question I appreciate everybody dialing in and we look forward to speaking to you again next quarter if not before.
And ladies and gentlemen, with that we'll conclude today's call and presentation. We thank you for joining you may now disconnect your lines.