Q1 2024 Houlihan Lokey Inc Earnings Call
It's definitely good day, ladies and gentlemen, thank you for standing by.
Welcome to the Houlihan Lokey as first quarter of fiscal year 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today July 27th 2023.
I will now turn the call over to Christopher Crain, Houlihan Lokey <unk> General counsel.
Thank you operator, and Hello, everyone by now everyone should have access to our first quarter fiscal year 2024 earnings release, which can be found on the houlihan Lokey website at www Dot H L Dot com in the Investor Relations section.
Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward looking statements. These forward looking statements, which are usually identified by use of words, such as will expect anticipate should or other similar phrases are not guarantees of future performance.
These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect and therefore, you should exercise caution when interpreting and relying on them.
We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-Q for the quarter ended June 32023, when it is filed with the SEC.
Yeah.
During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance.
These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP a.
A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release, and our investor presentation on the HL Dotcom website.
Hosting the call today, we have Scott Beiser, Houlihan Lokey, as Chief Executive Officer, and Lindsey Alley, Chief Financial Officer of the company. They will provide some opening remarks and then we will open the call to questions with that I'll turn the call over to Scott.
Thank you Christopher and welcome everyone to our first quarter fiscal 2024 earnings call. We ended the quarter with revenues up $416 million and adjusted earnings per share of <unk> 89 cents for the quarter revenues were down 1% and adjusted earnings per share were down 19% from a year earlier we.
Entered our first quarter hopeful to see some growth after a challenging fiscal 2023, but the M&A markets remained sluggish and deal closings in both M&A and financial valuation advisory or soft however throughout the quarter, we saw improvements in client confidence as a result of improving equity and debt capital.
Markets, which has positively affected the appetite for M&A at all.
Although still too early to call. It a trend we are seeing an improvement in deal momentum in M&A and a renewed interest from our clients and test in today's market conditions. After sitting on the sidelines for over a year as we look forward, we don't see any material macroeconomic overhangs that might slow this momentum down and eco.
<unk> statistics support a soft landing and likely increased M&A activity.
Our corporate finance business produced $227 million in revenues for the quarter. This was a decline from both the prior year period and last quarter lower results in corporate finance were driven by our typical first quarter seasonality, but also a sluggish first quarter market for M&A closings from a.
Vic standpoint, our U S corporate finance business in fact grew quarter over quarter, while Europe lagged due to ongoing economic headwinds.
As we have mentioned in previous quarters, the number and quality of new business opportunities continues to remain strong and for the first time in a long time, we're seeing discrete improvements in the M&A environment for deal closings also encouraging, albeit episodic is that several mandates which have been on hold for months.
Recently became active while interest remain interest rates remain much higher than in recent years. The market consensus is that we are at or near the peak of this interest rate cycle and inflation is improving with.
With this stability the debt capital markets environment, especially for middle market firms is more active than it has been in several quarters.
Our financial restructuring business had another strong quarter, producing revenues of $123 million. Both the number of quarterly closed transactions and the number of new mandates have increased steadily over the last several quarters when compared to the same periods in the previous year.
The restructuring business continues to benefit from higher interest rates and a fast approaching that maturity wall. Since this restructuring cycle is not the result of a one off crisis. We continue to expect financial restructuring to achieve elevated revenues over the next couple of years.
Financial and valuation advisory produced $65 million in quarterly revenues overall are more stable FBA business grew slightly last year, but has stalled in this market environment.
Our market neutral service lines are performing well, but the service lines that are tied to the M&A markets continued to be soft in our first fiscal quarter.
If the green shoots we're seeing seen in corporate finance and the overall M&A market view in fact produce an increase in M&A activity, we would expect FAA to see revenue momentum in the back half of our fiscal year.
During the quarter, we announced the signing of our acquisition of seven mile Advisors and services investment banking firm headquartered in Charlotte North Carolina. We expect this deal will close in our second fiscal quarter.
Also during the quarter, we hired six new managing directors as well as added 18, managing directors from internal promotions as previously reported.
Whenever we enter a challenging M&A environment like the one we have experienced over the last 18 months or so we recognize that our most important asset is our people and we worked very hard to keep that workforce motivated and in place through the cycle. In fact, we believe that supplementing that workforce with strong acquisitions and senior hire.
This is crucial as many of our smaller competitors don't have the benefits of our more diversified business platform I am pleased to report that whenever a more robust M&A market returns, we are extremely well positioned to capitalize on it as we have done an excellent job at retaining and recruiting our most important asset through.
This cycle and with that I'll turn the call over to Lindsay.
Thank you Scott revenues in corporate finance were $227 million for the quarter down 14% when compared to the same quarter last year. We closed 95 transactions this quarter compared to 124 in the same period last year and our average transaction fee was higher for the quarter versus the same quarter last year.
Financial restructuring revenues were $123 million for the quarter at 56% increase from the same period last year, we closed 30 transactions in the quarter compared to 16 in the same period last year. The average transaction fee on closed deals declined.
Financial and valuation advisory revenues were $65 million for the quarter, a 14% decrease from the same period last year, we had 786 fee events during the quarter compared to 876 in the same period last year.
Turning to expenses, our adjusted compensation expenses were $256 million for the first quarter versus $257 million for the same quarter last year are only adjustment was $7 8 million for deferred retention payments related to certain acquisitions, our adjusted compensation expense ratio for the first quarter in both fiscal 2024.
In fiscal 2023 was 61, 5%.
Given the current environment, we do not expect to change to our long term target of 61, 5% for adjusted compensation expense ratio.
Our adjusted non compensation expenses were $76 million for the quarter, an increase of $16 million over the same period last year.
And an increase of $8 million from the previous quarter.
This resulted in an adjusted non compensation ratio of 18, 2% for the quarter compared to an adjusted non compensation ratio of 14, 2% for the same quarter last year and 15, 3% for the previous quarter.
On a per employee basis, our adjusted non comp expense was 29000 per employee this quarter versus 26000 per employee for the same quarter last year as well as the previous quarter as a result of the timing of certain expenses the seasonality that we normally have in our first quarter that results in lower noncash.
Repetition expense did not occur in our first quarter better represents a likely outcome for the rest of the year.
However, we continue to see pressure across all of our non compensation expense line items, especially in Tammany as inflation per travel is running much higher than general inflation.
Beyond this year, we continue to expect that our adjusted non compensation ratio will settle in somewhere between 14 and 15% over the long term.
For the quarter, we adjusted out of our non compensation expenses $3 4 million in noncash acquisition related amortization, the majority of which was related to the GCI transaction.
Our adjusted other income and expense decreased for the quarter to income of approximately $3 million versus an expense of approximately 500000 in the same period last year the.
The improvement in this category was driven by higher interest rates.
Higher interest income on our cash balances across the globe as a result of higher interest rates.
Our adjusted effective tax rate for the quarter was 29, 2% compared to 24, 9% for the same quarter last year.
Last year, we had some favorable items that lowered our effective tax rate. In addition, our effective tax rate in our first quarter increased slightly as a result of the increase in the corporate tax rate in the U K from 19% to 25% effective April one 2023.
We adjusted out of our GAAP effective tax rate.
That we received as a result of our stock vesting in the first quarter.
We maintain our long term range for our effective tax rate of between 27% and 29%, but we expect that our effective tax rate for the year will be at the higher end of that range.
Turning to the balance sheet.
As of quarter end, we had approximately $490 million of unrestricted cash and equivalents and investment securities.
Our cash position declined this quarter as we paid a significant portion of our fiscal 2023 bonuses to employees can make.
And our first quarter, we issued approximately one 3 million new shares to employees as part of our fiscal 2023 year end compensation and we repurchased through withhold to cover approximately 760000 shares during the month of May.
Shares issued as part of our fiscal 2023 compensation will burst into fully diluted share count over a four year period from the date issued we continue to take a conservative approach to share repurchases. As we are prioritizing balance sheet flexibility to take advantage of acquisition and hiring opportunities in this market.
And with that operator, we can open the line for questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If.
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Our first question comes from the line of Brennan Hawken with UBS. Please proceed with your question.
Hi, guys hows it going this is Ben Rubin filling in for Brandon.
Hey, Ben Hey, guys, obviously, a challenging quarter for corporate finance given the industry headwinds I think when the last time. We previously spoke we kind of assume that a range of around $2 50 per quarter, what's kind of reasonable assuming the environment and the deal environment didn't inflect.
Either way, but it seems that this quarter around $2 27, you kind of have you guys kind of reached a new low with the results of this June quarter more about timing or did something structural change in that backdrop, which kind of led to the lower revenue performance. Thanks.
Yes, I don't think theres anything from a timing standpoint that would suggest.
Revenues failed to fall into this quarter and they will fall in the next quarter, having said that so far it does look like that April .
So far through our fiscal year and maybe through this whole trend is our trough.
Just I think ongoing headwinds that existed, especially earlier part of them.
The quarter.
Just didn't produce the results that we had hoped for and we're slowly but surely seen improved results over the last several months.
Great. Thanks, and then for my follow up My next question is on the kind of the state of the financial sponsor market. We've heard some of your peers say that they anticipate a pickup in sponsor led transactions, especially as we approach the back half of this calendar year, but one based on the conversations you guys have one Corey when do you guys expect.
To reengage to a greater extent, especially as it pertains to that on the metal market and lastly.
Is there any distinction between the willingness of sponsors to transact between say the domestic U S and international markets. Thanks.
At this point I don't think we see a significant difference to answering your last question first on the sponsor marketplace between the U S and Europe or other parts of the globe.
We're already starting to see that sponsors are more active in terms of dialogue interest in wanting to do something today versus three months ago or six months ago.
<unk> note at this point is even for deals that we're now more actively involved in versus which were on hold it is still going to take several months before those deals would close so we're clearly seeing improvements.
But it doesn't translate into revenues immediately it'll still take another quarter or two before I think youll start seeing.
If this current level of activity holds those kinds of revenues are going to more likely still show up in calendar 2024 versus the back half of calendar 2023.
Got it got it. Thank you that's very helpful color.
Our next question comes from the line of James <unk> with Goldman Sachs. Please proceed with your question.
Good afternoon, Scott and Lindsey and thanks for taking my questions.
Hi, James.
I suspect that the private credit ecosystem puts a.
A cap on the chapter 11.
Restructuring activity ecosystem, given less willingness to.
Actually default.
And bring companies.
Two bankruptcies, maybe you could just talk about how you think private credit has impacted the restructuring ecosystem or not.
Yes, im not sure the growing existence of private credit is.
Is making that much of a difference.
In terms of slowing down or stalling any of the restructuring activity I think we had a couple of things occurring one just the total amount of leverage indebtedness as we've been talking about for years is up substantially from where it was a couple of years ago, you had all of the feds.
Putting in money in the system, which they are not doing anymore interest rates are materially higher. So what you had a couple of years ago was there were other alternatives for people to do some form of a reorganization restructuring that doesn't exist today or if it does even if there are lenders who are willing to provide capital. It has had a higher interest.
Right. So all of these reasons amongst others is why we continue to think that the restructuring businesses is going to be rather buoyant for another couple of years and.
It is helpful that there are other alternatives.
You mentioned in the direct lending space.
But at this point, we don't think it's having any material impact on whats happening in the restructuring world.
Okay. That's very clear maybe just on the non M&A parts of corporate finance, maybe if you could just sort of break down the broad buckets in there and how those businesses are performing in this environment.
I still have a couple of pieces I mean, M&A is still the overwhelming majority of.
For us in corporate finance, we do have.
We'll call kind of our capital markets, which is the agent team are playing the adviser in the placement predominantly debt capital.
We also do <unk>.
<unk> raising for private equity and hedge funds and things of that nature.
It's been a tough environment and raising capital for funds just because I think Lps are still looking to get some liquidity on existing money they've deployed versus starting to point new money. One we think that will eventually cause more M&A activity and on the Mark.
<unk> capital markets as we describe it.
We're clearly hearing that there are more lenders and generally once again the private lenders that are more actively looking at transactions and we're actually getting multiple offer sheets something we just hadn't seen in Alaska.
Couple of months or couple of quarters, So that business is starting to see more activity.
Still early days I think before it translates into hopefully some more additional revenues.
That's very clear thank you so much.
Thank you Sir.
Our next question comes from the line of Ken Worthington with.
J J P. Morgan. Please proceed with your question.
Hi, good evening, Thanks for taking the question and maybe first following up on that.
How is financing availability developing today versus what you saw earlier in the calendar year, particularly for the middle market M&A customers and to what extent is.
Financing accessible.
Today or developing for some of your restructuring clients as well.
So on the first piece, what we would say is there is there has been a growing number of providers of capital over the last handful of years and that continues to grow.
But what we've found is theres been windows over the last probably six to 12 months, where there was very very little activity or all but for the best credits if you might.
Now there are more people, who are willing to deploy capital and they're more willing to look at companies that are still good companies, but they might not be extraordinary.
Companies are by no means would we say we're in a robust period.
But it's not a period of no activity and as I've mentioned in the previous question. We are just getting incremental.
Incremental people, who are willing to participate in the marketplace.
And expect that will likely continue at a slow but sure pace and part of it is just I think the expectation interest rates are pretty darn close to the peak there is a bit more certainty on where they think the economy is going companies going et cetera.
On your restructuring question.
Yes, the private capital.
Providers are also people, who are and are willing to participate in a restructuring.
And ultimately in a restructuring you need to have a solution and so if there's a party out there that will help get to a solution that is good for our business, it's not necessarily a solution that avoids some form of a restructuring or the necessity to our desire to hire advisors. So what I said before is.
Is there a helpful hand in restructuring they are actually not in a negative perspective in restructuring as we see the marketplace today.
Okay Awesome you read my mind on that thank you and then a quick follow up can you talk about the opportunity in real estate restructuring for Houlihan.
Okay.
Look I think everybody believes that there is still a lot of turbulence out there.
Specifics.
<unk> in real estate.
Some things classically will go through a restructuring some of it really depends probably on the cap stack. If theyre just one mortgage lender in one property they will still need to come to a solution, but they may not hire advisors to do it.
It's a very very big marketplace, we are participating in it clearly.
Way too early to tell not so much on how much reorganization of restructurings and needing to go on in real estate. It's at what point will they hire advisors and at what point do the owners and the singular or direct lenders just handle things themselves.
I will add that although our real estate industry group is on the smaller side relative to other industry groups are.
Our expertise in real estate restructurings.
During the great recession, and we won our fair share of transactions in that category. So the restructuring folks who have expertise in real estate are the same ones that did it 12 years ago 13 years ago are still here at the business head Houlihan and I think they are excited about the prospects over the coming years.
Okay, great. Thank you very much.
Yeah.
Our next question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question.
Hi, This is actually Michael Falco filling in for Devin how are you.
Good morning, Mike.
Good.
So maybe just to continue on the topic of restructuring to the extent that the M&A market is recovering in equity and credit markets are settling down recently does that impact the intermediate term outlook for restructuring at all or are these other factors, whether it would be higher interest rates or looming maturities, just too powerful and so prolonged cycle kind of feels inevitable.
Just a quick answer is yes.
But in a little bit more color. There. We do think we are entering a new environment that all three of our primary product lines.
Can and should grow over the foreseeable future and it is just I'll call. It both the pent up demand issues on the restructuring side and we are just at higher interest rates and so even if we don't believe that they're going to go up much more they're not coming back down to zero, maybe ever or at least not for the foreseeable future. So theyre just does feel like there is a.
A lot of work out there for restructuring for the next couple of years and it does feel as we've said that we're slowly but surely moving away from headwinds and hopefully when a tailwind on the corporate finance side in FCA tends to net net follow the M&A marketplace as well.
Great that's very clear and then when you think about the potential for an M&A recovery in some of the improvement Youre seeing in that market do you expect it could be uneven and by that I mean could we see a scenario where high quality assets will be sold with a lot of interest as well as its tied to the cycle or the macro will maybe continue to stand or sit.
Which could maybe mute the upside.
I think you'll always find that in the worst of times great assets are still are bought and sold and.
And probably in very robust time periods, even average or below average assets can trade.
So we've experienced in the middle market, the exceptional businesses and even though I'll call. It a very good business has still been doing deals and you are getting further into the.
Core of different kinds of businesses.
We've seen some starts and stops and starts over the last 18 months, it's possible that could happen again.
But we do think there is just certain factors going on in the marketplace today and maybe the evidence over the last 30 60 90 days just suggest that we're moving forward and M&A.
Just with the cautionary note it is still going to take another quarter or two I think before youll see some more meaningful revenue results.
Okay I'll hop back in the queue. Thank you.
Our next question comes from the line of Steven <unk> with Wolfe Research. Please proceed with your question.
Good afternoon. This is Brendan O'brien filling in for Steven.
Just to start just wanted to touch on Europe .
It sounds like that business and in corporate finance in particular saw some weakness this quarter and the central banks in Europe are running a bit behind the fed in terms of where they are in the rate hike cycle.
And we've seen how the uncertainty uncertain path of rates has impacted activity in the U S. Excuse me given you guys are close to that market would be great to get your perspective on how the dynamics are playing out in that region relative to the U S. At the moment.
Sure.
So yes, we had the same question for the M&A bankers as part of this.
Earnings cycle and their response was that the markets in Europe , although very soft in our Q1.
Our non operating in a much different pace than the U S. So the activity levels the desire to test these markets.
<unk>.
At least short term optimism that exists in the U S. We're seeing in Europe as well so kind of looking forward over the next couple of quarters. We are hoping based on that that the European market performed similarly to the way the U S markets are hoping to perform and so.
It did have an outsized impact last quarter.
And we're hoping that thats reversed itself and we will see in the next next several months.
And just a follow up on Europe actually.
There's been a lot of.
There is a credit suisse going under Rothschild going private I'm just interested to hear about how you are seeing market share gain opportunities within the region. I know you just continue to invest thereafter.
<unk> acquisition and have been integrating the platform that would be great to get a sense as to what the growth prospects are just beyond.
The general M&A market.
We think we have made substantial.
Strides in just our brand awareness out in Europe from where we are today from a couple of years ago. I think the fact pattern into credit Suisse. Just in what they tend to do versus what we do has been much less of an impact positive or negative to us and Rothschild is still going to be a very great competitor, whether they're public or private.
I think we have continued to be able to attract and retain.
Quality bankers that we might not have been able to a couple of years ago.
And we continued to round out the different industry.
Industry sectors that we specialize in Europe , we've added meaningfully to the financial sponsor coverage out in Europe that we didn't have and the one other thing I would add to lindsey's comment a minute ago, while our European business was softer than our U S business addressing for head count part of it's also.
Technology is that sector is a bigger percentage piece of our European corporate finance practice than it is of the U S.
In the technology industry sector across the globe has not performed as well year over year compared to some other industry groups. So part of the strategy has continued to be is to build out the various sub industry sectors in the financial sponsor coverage that we have been very successful and in the U S and do it in Europe as well.
I think as we make ongoing headway there I suspect we will continue to see improvements in our European business.
Above and beyond whatever the European economy does relative to the U S economy.
That's great color thanks for taking my questions.
Brendan.
Our next question comes from the line of Ryan Kenny with Morgan Stanley . Please proceed with your question.
Hi, good afternoon.
Hi, Brian .
Wanted to follow up on the comments around non comp expenses, you mentioned that they're elevated both on a reported basis and also on a per head count basis, and it sounds like that will remain elevated in that range for the.
For the foreseeable future is there anything you're doing to offset those headwinds or should we think about that is just the cost of doing business and maybe it's a good thing because it shows you are getting in front of clients.
Activity is picking up as the environment improves.
How should we think through that thanks.
I think we have not.
Pulled back on the expenses that helped drive revenue.
During this cycle and <unk> is probably the most obvious one we are continuing to encourage our bankers to get in front of clients.
I think all expectations are that we are going to ride along with our peers quite a wave here once the M&A markets return and so the answer on the <unk> side is no. We are we think that the face to face interaction with our clients is as important as it's ever been.
On the rent side I think we had a little bit of a perfect storm, we had kind of three or four largest locations.
Come due over the last 18 months or so we spent quite a bit of money on expanding those locations and it's costly and it's and it's shown up in our rent and and I think this year and really go out 18 months, we've seen some significant growth in rent.
You will see that start to stabilize towards the second half this year and returned to normal for lack of a better way to describe it.
So I think those are the two line items within non comp that have driven sort of what I would call outsized increases and I think it's really timing from a rent standpoint and <unk>.
Bankers kind of returning to in front of their clients on the <unk> side, and it's a little hard to tell post COVID-19, what that's going to look like in terms of what the run rate is but those are the those are the two comments that I'd make on.
Tom.
Thanks Thats helpful.
Okay.
There are no further questions in the queue I'd like to hand, the call back to you Scott Beiser for closing remarks.
I want to thank you all for participating in our first quarter fiscal year 2024 earnings call and we look forward to updating everyone on our progress when we discuss our second quarter results for fiscal 2020 for this coming fall.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.