Q1 2023 Greenhill & Co. Inc. Earnings Call
Yeah.
Good day and welcome to the Greenhill first quarter towards he told Q3 earnings call all participants will be in listen only mode.
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I would now like to turn the conference over to Patrick Xu and holes.
Director of Investor Relations. Please go ahead.
Thank you good afternoon, and thank you all for joining us today for Greenhill first quarter 2023 financial results Conference call I'm, Patrick Schoen 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.
Orderly 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 our revenue was $49 $7 million for the first quarter, 9% better than last year's first quarter, but considerably lower than we would like as a result of what was obviously a very difficult operating environment, while the pace of transactions has been slower than usual in the past couple of quarters, given volatile markets difficult credit conditions and economic uncertainty we are.
<unk> by the level of engagement, we are seeing particularly with regard to M&A interest from our corporate clients.
It's worth noting that our firm is of a relatively small size, where our revenue trajectory can differ meaningfully from either a results of competitors our overall changes in market activity.
Accordingly, consistent with what I said on our last call. We expect our revenue improvement over last year to grow significantly in the second quarter, leading to our best first half in recent years, there's always less visibility for quarters further out but as markets continue to stabilize credit conditions improve and global deal activity rebounds promoter very low year to date levels, we are well positioned to better.
Fit in quarters to come.
On the cost side, our compensation costs were elevated to just over $60 million for the quarter largely as a result of the timing of the recognition of an accounting charge related to incentive compensation.
However, already in the second quarter, our absolute dollars of compensation expense will decline significantly back to a normal level and as those costs decline a greater revenue materializes. Our objective is to bring our compensation ratio down toward our target range by year end just as we've done in the past few years.
Meanwhile, our non compensation cost of just under $15 million were higher than last year's as a result of higher travel expenses as client travel has continued to normalize post the pandemic and some one off costs related to relocating our London office, even with these the level of non compensation expense remained within our target range.
Looking ahead, the London relocation expenses are now behind us and we will not be burdened by the duplicative rent we had as we made major office moves in London and in New York over the past few years.
It is early in the year to draw many conclusions about our business performance by region sector or type of device, but I can make a few points based on our early results and current pipeline by region. We expect strong performances in Australia, Canada, and Spain, as well as improved performances in the U S and UK.
By sector Industrials is our largest focus area and that should be a productive area. This year mining and energy is another very active area for us, including newer Green energy technologies, and our health care and consumer teams are also quite busy by type of advice corporate M&A is where we see the most opportunity relative to most of our competitors we should benefit.
In the current market from having lots of our reliance on financial sponsors than most.
We are also seeing restructuring activity pick up from the low level last year when credit conditions were favorable for much of the year.
While we don't expect anything like the pandemic period boom in restructuring, we believe we could be at the beginning of a longer period of robust restructuring activity given the current mark economic circumstances than most of the case in the brief pandemic era of restructuring boom.
Our capital Advisory team continues to take an attractive new fund placement projects amid what is a challenging fundraising environment and should generate increased revenue as the year goes on.
Notwithstanding that financial sponsors are not a particularly large portion of the M&A market at the moment given challenging credit market conditions, winning more business from this client group, which has enormous dry powder to be deployed once market conditions have stabilized continues to be our central strategic initiative for the future growth of our business. We believe our industry sector expertise are.
Ross border capabilities, and our ability to access public companies are all advantages as we worked to build this business.
Turning to our balance sheet, we ended the quarter with $58 $8 million in cash and debt of $271 million at the end of the first quarter, usually marks our low point in terms of liquidity given the timing of bonuses deferred compensation payments and tax withholding on restricted stock vesting.
During the quarter, we repaid $1 $8 million of principal reduction on our debt pursuant to a contractually required excess cash flow payment during.
During the quarter, we also repurchased 577349 shares and share equivalents, mostly the latter in the form of tax withholding on the vesting of restricted stock and that was for a total of $7 $9 million and our board of directors also approved our usual quarterly dividend up 10 cents per share.
Our term loan matures in just under one year from today, our plan is to refinance or extend that loan in the relatively near term at such time as we believe market conditions are optimal for that as I said last quarter. Our primary focus is now on deleveraging given the increased cost of debt. We may pay down some principle at the time of refinancing or extending our loan and in any event aimed to deleverage.
Significantly over the next few years.
I'll end with a brief note on recruiting we've recruited two new managing directors for the year to date, including one mentioned in our press release today, we remain in dialogue with many other candidates and what appears to be an active market for senior banking talent and we aim to add several more managing directors in the weeks and months to come with that I'm happy to take any questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Devin Ryan with JMP Securities. Please go ahead.
Hi, Good afternoon, Scott Patrick how are you.
Good how are you.
Good.
Just first question just on the outlook here. So obviously good to hear about the continued expectation for the best first half in years.
Clearly the bar I guess it was pretty low just given kind of the cadence of first half for you guys. So just maybe love to push out a little bit further.
I know you don't have a crystal ball, but just based on some of your other comment Scott.
Can you maybe just frame out what the environment feels like today relative to maybe a year ago, which would maybe I'm clearly conditions could change, but maybe give us some sense of kind of the full year view.
And the data we're tracking at least for <unk> would suggest you know the comments you've made about <unk> makes sense I'm just trying to look out a little bit further thanks yeah.
Sure Fair enough look I think.
There's kind of two things there's the environment and then there was kind of what we see internally right and we're a small enough from that we're not you know we're not like an index fund that's going to track you know M&A volume up and down over the course of a cycle I think there's no doubt we're in you know.
What is a challenging market for M&A transactions and if you look at the data you know sort of announcements or bought deal volume or whatever.
Year to date versus you know, even the last decade or more it certainly at the low end of the range, but we feel like the you know what we're focused on you know a lot of work for major public companies that are well capitalized don't have a lot of challenges in terms of arranging financing for transactions, we feel like that's.
A good niche to be in and you know and very specifically, we're looking at a pipeline where you know frankly, there's kind of a surprising number of quite large.
Transactions that are quite far advanced. So you know obviously you won't see a lot of those both announced and close in the second quarter, which means that our you know we think we're going to carry a fair amount of high quality backlog into the latter part of the year and beyond So I you know I think net net we're we're certainly when we look at our own pipeline we are more.
We're optimistic than most others.
Think sound and in the market. These days and I think Thats just a function of you know if you're a affirmed many times our size youre going to be really beholden to how the whole market is doing rest for us. If you know if you have a you know if your clients and your client focus tends to be one where there's a lot of activity bubbling behind the scenes than you know you can you can.
A better an outlier and that that's where we think we are.
Got it okay, and just to dig in a little bit on that so you know I I.
Get the kind of the corporate piece and you mentioned, there's some kind of large chunky deals in there as well or what you're working on.
Are you seeing kind of the activity being broad based or is it was it is it really specific just to kind of use some.
You do see credit transactions or certain geographies, just love to get a little more flavor for that as well.
I think it's fairly broad based I mean, we're seeing it you know I highlighted some of the regions, but I mean, certainly our you know some of the things. We're excited about in our pipeline. There's you know there's a good mix between the U S and Europe and Australia, It's a smaller market, but we're quite excited with what's what's happening down there is while we were active in the mining space.
There's been some good activity in.
Canada continues to be a good market for us So I think in most sectors and most regions.
Feels pretty good right now there so I'd say in sort of a fossil fuel type energy I think things are challenged by the extreme volatility in oil prices and even more natural gas prices, but.
In in sort of a greener energy technologies I'm pretty much in every other sector. We're involved in you know it's a pretty good mix. So it's not just one or two sectors of one or two regions, where we're seeing a good.
Good activity.
Okay, Great last one just on the.
Incentive charge the accounting there.
Quite follow exactly what happened. So just if you can just give some more background. If you can.
Whether that.
Is there any pull forward of future expense as well.
Yeah look I think it's a one off in the sense that it's it. It's just the you know the way you pay people and and how things vast and someone can sometimes lead to a two sort of compensation expense being being sort of clustered in a particular quarter and you know given that it wasn't a real strong revenue quarters sort of sticks out more and more.
Than it otherwise would have but you will see our comp our absolute dollars of comp go all the way back to a very very normal level in Q2 and and over the course of the rest of the year. So I think this will all get lost in the you know in a year that will look very very different than the other three quarters in this regard.
Okay got it thanks.
Thanks, Scott I'll hop back in the queue kept more of I'll, let others ask thanks, Okay. Thank you.
The next question comes from Matt Boone with K B W.
Go ahead.
Hi, Good afternoon, just wanted to touch on the post should be operating environment.
Pacific curious on your thoughts on the on kind of the medium term implications of the recent events impacting the commercial banking sector and how.
How do we should be thinking about potential trickle down and packs.
So your business in the sector overall, just kind of given the potential for banks to hold a larger proportion of capital for example, and highly liquid assets among other factors and kind of somewhat related how have your views kind of the ball.
Kind of a restructuring cycle if at all since these events would love to hear your thoughts there.
Okay. Good good question look I think what's happened in the bank market recently is.
Sort of two separate impacts one I think somewhat neutral in one I think actually positive. If you look at our M&A business I don't see much impact at all I mean, our.
I would say an overwhelming majority of the M&A deals we work on the financing is coming from the biggest banks in America and around the world. So.
So I don't think the loss of regional banks.
You know the ones that have failed I don't I can't even remember an M&A deal. We did that was financed by one of them. So I don't think I see any real impact on us.
M&A in our ability to do M&A deals and as I said, our business is a little more skewed toward better capitalized larger companies anyway that probably tend to almost always banquet. Those those larger places I just think it probably helps us all on the restructuring side because if you you know I don't think we're going to see a wave of like massive companies are going bankrupt or near bankrupt but.
I think in sort of the smaller and mid cap type companies that may well bank. It at some of these regional.
Regional banks or other places where credit is going to get a little bit tighter.
To lead to more.
That's all the bankruptcies, but but certainly more restructuring of debt sometimes out of court, sometimes in court and so I think it probably is part of what is making us optimistic about sort of a longer term not just boom in restructuring, but a longer term period of like you know a robust level of activity do you keep the team busy and productive.
Okay, Great and then just another follow up for me just looking ahead at that term loan. That's due in April of next year I appreciate that you've kind of in your prepared remarks committed to continuing to focus.
Additional capital allocation on repaying this debt ahead of maturity, but.
As you know.
You'll probably necessitate a refi extension or alternative capital solution. So.
I was just wondering if you could kind of provide more specifics on how you anticipate to address this maturity.
Particularly if it's like the market environment continues to remain challenged in a similar way as we've seen between now and then would.
Love to hear your thoughts there as well.
Sure I mean as far as far as the environment goes I mean from the firms were talking to about.
Our refinancing I think the markets actually gotten quite a lot better just recently certainly than it was at the height of the bank crisis and if you look at you know some of the so called reverse blacks.
Happening in some of the deals being priced so it feels like it's getting better but I think if you also overlay that with my comments about how we see the you know the year playing out in the second quarter and you know what we're expecting in terms of our visible pipeline building for the second half I you know I think where we're headed toward a period that will be.
Optimal for us in terms of what our results will look like and what our trailing 12 months, our kind of our metrics will look like the lenders like to look at and I think there's a you know a very good chance that aligns with what is already a bit of an improving environment, but you know I I I don't worry about it too much I focus.
Mostly on our results I think if our results are good which I think they will be I think well easily get a refinancing done on the right kind of terms to go forward. So a.
But the reason, we've just kind of weighted maybe a little bit longer than we might have is because of the way we see the quarters, playing out and we'd rather go to the market in a period of strength, which we think will be out soon rather than you know at the immediate moment.
Okay, great. Thanks, guys.
Okay.
The next question comes from James <unk> with Goldman Sachs. Please go ahead.
Good afternoon, and thanks for taking my questions. If we just turn to the private funds advisory business. The fundraising backdrop for sponsors has certainly been weaker recently and I think the outlook remains challenging and looking ahead.
So that youre, winning more mandates and the business is performing well.
Firm, but maybe you could just speak to the broader market trends in the various verticals in which you participate in that business.
Sure I mean, there's no question that that is a it's a challenging fundraising environment and I'm you know I'm glad that's a very really a very small part of our business as compared to M&A or restructuring.
We're still in the building phase in terms of primary fund raising so we're you know we're winning high quality mandates were getting closings dunbar raising money, but it's a it's a slower process than then you know it isn't sort of more typical market.
<unk>, but I'd also add that you know on the secondary side things are quite busy mean for kind of the same reason there are institutional investors want liquidity that makes them maybe less likely to.
Commit to a new fund, but it maybe it makes them more likely to sell.
A portfolio that they've been invested in over the year or so so that part of the business has been pretty active in them.
For urgent tried to come to a restructuring at what they can do out of court.
Okay. Thanks, so much.
Thank you.
And we have a follow up from <unk>.
Okay.
Alright, alright. Thank you yeah, I just want to come back to the restructuring point, just getting kind of the acceleration in activity I. Appreciate we're coming off of a relatively low base here, but you know as the expectation that will maybe see some of that revenue new year over year coming through in the back half of this year or are you seeing a much more.
2024 story, just trying to think about the the contribution to maybe the the full your outlook this year.
Yes, I I I think very much this year and really in fact, even already in the second quarter, what we'll start to see the restructuring pickup versus what was you know a very quiet. Your life made me think about a year ago My credit markets for wide open.
Very very little restructuring activities. So I think we'll start to see a positive differential you know frankly in Q2 and going forward from there.
Okay got it thanks, a lot forgot to leave it there.
Okay. I think that's our last question I appreciate everybody dialing in and we will look forward to speaking to again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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