Q2 2024 Houlihan Lokey Inc Earnings Call
Okay.
Good day, ladies and gentlemen.
Thank you for standing by but to.
To Houlihan Lokey <unk> second quarter fiscal year 'twenty 'twenty four earnings conference call I'd sign 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.
The 26 2023, I will now turn the call over to Chuck Shamrock Houlihan Lokey as Chief compliance Officer. Please go ahead.
Thank you operator, and Hello, everyone by now you should all have access to our second quarter fiscal year 'twenty 'twenty four earnings release, which can be found on the houlihan Lokey website at www Dot H L Dot com in the Investor Relations section.
Four 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 the 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 September 30, 20 twenty-three when it is filed with the S E C.
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.
These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release, and our investor presentation on the H L Dot com 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 Chuck welcome everyone to our second quarter fiscal 'twenty 'twenty four earnings call. We ended the quarter with revenues of $467 million and adjusted earnings per share of $1 11.
Revenues were down 5% and adjusted earnings per share were down 7% from the quarter a year earlier, however, and.
In comparison to the June quarter revenues were up 12% and adjusted earnings per share were up 25% over.
Over the last seven quarters and during a challenging time in the world financial markets. Our diversified business model has enabled us to produce steady results with quarterly revenues consistently in a range of 416 million to $490 million, our business activity and financial results have shown.
<unk> improvement since April and we enter our third fiscal quarter with measured optimism.
The market environment for our corporate finance and financial and valuation advisory business is improving but at a pace that is likely to result in a slow exit from this market environment.
With their commentary in the previous quarter, we continue to experience improvement in client confidence as a result of improving capital markets.
We see some improvement in deal momentum in M&A and a renewed interest from our clients and testing current market conditions after sitting on the sidelines for more than 18 months.
However, recent events, including rising interest rates are stalled stock market and the war in Israel have slowed some of the momentum we experienced in late spring early summer.
Looking forward, we remain optimistic that market conditions will continue to improve but we are realistic about the macro pressures that exist today.
Our corporate finance business produced $282 million in revenues for the quarter. This was a decline from the prior year period, but an increase from last quarter for several months. We have continued to experience a solid level of new business opportunities financial sponsors are showing increased interest in taking there.
Our portfolio companies to market. This is a result of improving availability of debt capital a resilient stock market pressure from limited partners seeking liquidity and a desire by P managers to get back into the deal business versus maintenance business.
Strategic buyers and sellers are also slowly coming back boy by an improving equity markets and continued stable financial performance.
This increased interest to transact is still tempered by a fickle M&A market, resulting in a longer time to close transactions and deeper due diligence.
With respect to our capital markets business, our revenues are up year over year, driven by improvements in availability of credit, particularly in the mid cap space.
Also capital is harder to access than it was in calendar 2021, which has increased our value proposition for this service line.
Historically in a business rebound, we see capital markets improving first then M&A activity follows we expect this rebound to follow a similar path.
Our financial restructuring business had another strong quarter, producing revenues of $115 million, while they're structuring business continues to benefit from higher interest rates and a fast approaching that maturity wall the growth in new business slowed during the quarter likely a result of improving capital markets, while the U S.
Russian market has leveled off of that causing a slowdown in new business activity. We have seen continued strength in our restructuring business in Europe, Asia, and South America, where we believe our brand and market presence is second to none.
As we have said on previous calls since this restructuring cycle is not the result of a one off crisis, we expect to experience elevated revenues over the next couple of years versus a significant revenue spike and subsequent drop as we experienced in previous cycles.
Financial and valuation advisory produced $71 million in quarterly revenues down from the same quarter last year, but higher than anything we have reported for F. D. A in the last three quarters, our market neutral service lines continue to perform well in this environment, while our service lines that are tied to the M&A markets are lagging previous.
Your results if the slow but general improvements were seen in corporate finance and the overall M&A markets produced an increase in M&A closings, we would expect FAA agency positive revenue momentum in calendar 2020 for.
Although we resumed share repurchases. This quarter, we continue to take a conservative approach to excess cash in order to give us plenty of balance sheet flexibility to take advantage of acquisitions that may arise.
Also during the quarter, we had two new managing directors start and believe that the market for hiring senior bankers remains attractive.
Over the last seven quarters, our senior hires acquisitions and geographic expansions have resulted in significant value being added to our investment banking platform. We believe we are well positioned for growth as market conditions continue to improve and we are well prepared to maximize that opportunity for the benefit of our employees.
And shareholders and with that I'll turn the call over to Lindsay.
Thank you Scott.
Revenues in corporate finance were $282 million for the quarter down 11% when compared to the same quarter last year.
We closed a 117 transactions this quarter compared to 114 in the same period last year, although our transaction count increased our average transaction fee was lower for the quarter versus the same quarter last year. This was a result of deal mix and not the result of any trends in transaction value or <unk>.
Financial restructuring revenues were $115 million for the quarter, a 17% increase versus the same period last year.
Those 31 transactions in the quarter compared to 24 in the same period last year and our average transaction fee on closed deals declined slightly.
In financial and valuation advisory revenues were $71 million for the quarter and 8% decrease from the same period last year, we had 852 P events during the quarter compared to 890 in the same quarter last year.
Turning to expenses.
Our adjusted compensation expenses were $287 million for the quarter versus $301 million for the same quarter last year.
Our only adjustment was $9 3 million for deferred retention payments related to certain acquisitions.
Justin compensation expense ratio for the second quarter in both fiscal 2024 and fiscal 2023 was 61, 5%.
We do not expect a change to our long term target of 61, 5% for adjusted compensation expense ratio.
Our adjusted non compensation expenses were $75 million for the quarter, an increase of $3 million over the same period last year.
But flat from the previous quarter.
This resulted in an adjusted compensation expense ratio for <unk>.
16, 1% for the quarter compared to an adjusted non compensation expense ratio of 14, 8% for the same quarter last year.
Per employee basis, our adjusted non compensation expense was 29000 per employee this quarter versus 30000 per employee for the same quarter last year.
We typically see some seasonality in our adjusted non compensation expenses with the second half normally coming in modestly higher than the first half we expect that trend to continue this year.
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.
And $1.5 million for the act for acquisition related costs, primarily related to the seven mile acquisition, which is expected to close during our third fiscal quarter.
Our adjusted other income and expense decreased for the quarter to income of approximately $2 $5 million versus an expense of approximately $1 2 million in the same period last year. The improvement in this category was driven by higher interest income on our cash balances across the globe as a result of higher interest rates.
We adjusted out of our other income and expense a gain of 816000 related to the payment of an earn out on our previous acquisition.
Our adjusted effective tax rate for the quarter was 28, 4% compared to 27, 9% for the same quarter last year.
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 $525 million of unrestricted cash and equivalents and investment securities as.
As a reminder, we will pay the deferred cash bonus related to compensation in fiscal year 2023 to employees in November which will significantly reduce our balance sheet cash.
In this past quarter, we repurchased approximately 239000 shares at an average price of $1 four.
$104 33 per share as part of our share repurchase program. We continue to take a conservative approach to share repurchases as we are prioritizing balance sheet strength and flexibility to be able to take advantage of acquisition and hiring opportunities in this market.
And with that operator, we can open the line for questions.
Thank you we will now be conducting a question and answer session.
Who would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your questions from the queue.
For participants using speaker equipment it.
May be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
The first question comes from the line of Brennan Hawken with UBS. Please go ahead.
Good afternoon. Thanks for taking my question guys wanted to start with the comments on corporate finance market.
So.
Totally appreciate the environment's been challenging and somewhat fluid, but I'm curious about your perspective on sponsors where we're hearing that sponsors have been a bit slow to return to the M&A market and I'm curious about what youre seeing there and end with this maybe a.
A little bit of caution added to the more positive outlook do you think that it's reasonable to expect some seasonality here this year in the corporate finance line.
Barnwell I think there's two questions there I'll take at least the first one on the sponsors I think we've continued to see really over the last several months and improved interest by sponsors to start doing things with their portfolio companies. We see that in terms of number of pitches that we've participated in.
We've seen that in the their attendance in our various industry conferences, we've seen that in terms of them asking us to get started.
In processes.
We continue to hear from them that there is some new gene by Lps to start returning capital and there's issues I think from the employee base our sponsors that eventually need to start getting back into the what we'll call. The deal business, having said all that there's still not going at the pace that I think we all experienced in the industry three years.
[noise] ago, five years ago, seven years ago, So I won't quite say, they're exactly at the normal pace, yet, but we do think it's improved from where they were 369 months ago and.
And on your question on seasonality for as long as I can remember except for calendar 2022.
The December quarter is almost always the best quarter for the industry and not too dissimilar for Houlihan Lokey either calendar 2022, the December quarter did not stand out like other quarters. So maybe a host of reasons and once again kind of unclear, where the lawyers and bankers and accountants and.
All of the other service providers are there going to be pushing for various probably compensation or tax related reasons to get something done by this quarter or will they be more motivated to slip things where they do have control into the next quarter I don't know we know what historically has happened and we also know that calendar 2022.
What's the operation and I guess, we'll find out pretty soon what calendar 2023 oleds.
Yeah. That's fair. Thanks, Thanks for that Scott and when we think about the the MD count and corporate finance notice that it was down quarter over quarter could you maybe speak to what drove that decline and whether or not you would expect that to continue or what was behind that.
Yep.
So what I think we do like in every year and remember we're a March 31 company.
So it's that time period, where we were talking to always a small subset of our Mds that maybe we think they are in the wrong platform are performing at the level, we'd like when there is some involuntary departures as well and then they typically occur some in the June quarter. Some in the September quarter. So I think that's just the normal year end.
Offsetting that is obviously, we we promoted a number of M D. As in April we hired a number of new Mds in.
The June quarter, as well as the September quarter and much like others in the industry. We have other offers that have been accepted but they just have not started yet so effectively our head count is pretty similar over the last really here and I think it's just a little bit of a typical transition of some departures and then filling in with.
It'll either through promotions or external hirings.
Okay, great. Thanks for the color.
Okay.
Thank you next question comes from the line of Gms, Seattle with Goldman Sachs. Please go ahead.
Unknown Executive: Good day, ladies and gentlemen. Thank you for standing by. Welcome to Houlihan Lokey's second quarter fiscal year 2024 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, October 26, 2023.
Good afternoon, Scott and Lindsey and thanks for taking my questions.
Maybe you can just start with restructuring, which you know it was a little bit weaker in the quarter that I think you know.
No.
The quarter before but against this obviously rates continue to rise. So so how do you think about the move in the long end of the curve and its impact on.
On restructuring and do you think the opportunity set has improved.
Chuck Yamarone: I will now turn the call over to Chuck Yamarone, Houlihan Lokey's chief compliance officer. Please go ahead. Thank you operator and hello everyone.
I think it's pretty hard to make a case that things do not look good for the restructuring industry for at least the next couple of years, just on where certain businesses are performing where interest rates are just the maturity wall.
Chuck Yamarone: By now you should all have access to our second quarter fiscal year 2024 earnings release, which can be found on the Houlihan Lokey website at www.hl.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 the use of words such as will, expect, anticipate, should, or other similar phrases are not guarantees of future performance.
A whole host of dynamics, we've always found that that business at least for US is probably the most lumpy where sometimes you get a more sizable projects that may close in one quarter versus another we did note in our remarks, there was a bit of a slowdown in new business activity, albeit was only in the United States.
And I think it continues to ramp up in other parts outside of the United States and we expect that we will be operating at this higher level for the foreseeable future and as you mentioned, yes.
A continuation of the theme now probably in interest rates, which might be higher for longer net net is good for the restructuring environment.
Chuck Yamarone: 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 filing, including the Form 10Q for the quarter ended September 30, 2023, when it is filed with the SEC.
Okay. Thank you and then as a follow up just you know M&A continues to.
You know maybe it's about the trough, it's increasing slowly however, you want to think about it but you know I would imagine.
And that perhaps opens up the window for you to contemplate more acquisitions and some of the smaller firms haven't seen.
Revenue recover so maybe you can just talk about how you're thinking about the potential for bolt ons from here.
Linda do you want to.
Cover that you've been talking to a number of acquisition targets we've been pursuing.
Chuck Yamarone: During today's call, we will discuss non-gap financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered an isolation or as a substitute for our financial results prepared in accordance with GAP. A reconciliation of these measures to the most directly comparable GAP measures is available in our earnings relief and our investor presentation on the HL.com website.
Sure Yeah look I think the pipeline is as robust as it's ever been.
I think the longer.
M&A recession, if you want to call. It that continues as you suggested the tougher it is on smaller firms that don't have our restructuring practice in particular.
But I think for us it's very important we don't rush it.
We.
Our acquisition process is it's usually a long one we'd like to get to know the management teams to make sure that theres a good cultural fit.
Unknown Executive: Hosting the call today, we have Scott Beiser, Hula Hanloke's chief executive officer, and Lindsay Alley, chief financial officer of the company. They will provide some opening remarks, and then we will open the call to questions.
And there is normally a process of for lack of a better word dating that we go through and we're doing that we're not rushing it given the circumstances. So I think acquisitions will continue to be an important part of our nonorganic growth.
Scott Beiser: With that, I'll turn the call over to Scott. Thank you, Chuck.
Scott Beiser: Welcome, everyone, to our second quarter fiscal 2024 earnings call. We ended the quarter with revenues of 467 million and adjusted earnings per share of $1.11. Revenues were down 5% and adjusted earnings per share were down 7% from the quarter a year earlier. However, in comparison to the June quarter, revenues were up 12% and adjusted earnings per share were up 25%. Over the last seven quarters and during a challenging time in the world's financial markets, our diversified business model has enabled us to produce steady results with quarterly revenues consistently and a range of 416 million to 490 million.
Does provide some opportunities in a market like this but we do have to move at a speed that makes sense for both parties and we continue to do that.
That's very clear thank you.
Yeah.
Thank you next question comes from the line of Devin Ryan with JMP Securities. Please go ahead.
Hey, guys. This is Alex Jenkins stepping in for Devin Ryan Hope you guys are doing well.
I guess just a follow up on that restructuring question. Obviously, we've been talking a lot about the maturity wall coming in 'twenty four and 'twenty. Five can you just talk about how you're proactively getting ahead of clients and what the catalyst is going to be for them to take action.
Scott Beiser: Our business activity and financial results have shown consistent improvement since April, and we enter our third fiscal quarter with measured optimism. The market environment for our corporate finance and financial and valuation advisory business is improving but at a pace that is likely to result in a slow exit from this market environment consistent with their commentary in the previous quarter we continue to experience improvement in client confidence as a result of improving capital markets.
Meaning should we expect a flurry of activity, leading up to that or will we see a step up function of activity as time kind of runs out.
Thank you.
I think consistent with our comments that this just isn't the crisis mode. It just a probably a little bit of playing catch up.
As well as just the higher interest rate world.
I think youre going to see more of a steady flow of business and some companies more proactively early on we will try to do things before they hit the maturity walls. Some take a little longer I think the major difference today versus what we've seen over the last couple of years.
Scott Beiser: We would interest from our clients in testing current market conditions after sitting on the sidelines for more than 18 months. However, recent events including rising interest rates, a stalled stock market and the war in Israel have slowed some of the momentum we experienced in late spring and early summer. Looking forward, we remain optimistic that market conditions will continue to improve but we are realistic about the macro pressures that exist today. Our corporate finance business produced 282 million in revenues for the quarter.
There is an ability to do refinancings that maybe you didnt, even exist six or nine or 12 months ago, but refinancings are at a higher interest rate. So it doesn't necessarily solve their problem.
And I think we continue to chat with companies that we know maybe have.
Some struggles in their business plan and their financial results in a balance sheet, which in today's world in today's interest rate.
Causes them to need to come to some solution.
And this is the reason I think the industry will just have some elevated results in restructuring for the next couple of years.
Scott Beiser: This was a decline from the prior year period but an increase from last quarter. For several months we have continued to experience a solid level of new business opportunities. Financial sponsors are showing increased interest in taking their portfolio companies to market. This is a result of improving availability of debt capital, a resilient stock market, pressure from limited partners seeking liquidity and a desire by PE managers to get back into the deal business versus maintenance business.
Sure.
Makes sense, thank for that color I guess as a follow up I'm.
Just on the expenses you guys have been able to hold the line unexpected ratios, particularly relative to your non middle market peers.
If the M&A market doesn't recover do you see a scenario, where you might have to take that comp ratio structurally higher or is this just an example of the difference of your business models. Thanks for the time.
Okay.
I think it's I think it's probably the latter I mean, we do have some structural differences that allow us some flexibility in how we run the compensation ratio and in market conditions like the one we're in we're clearly confident enough to suggest on.
Scott Beiser: Strategic buyers and sellers are also slowly coming back, boy, buy in improving equity markets and continued stable financial performance. This increased interest to transact is still tempered by a fickle M&A market resulting in a longer time to close transactions and deeper due diligence. With respect to our capital markets business, our revenues are up year over year, driven by improvements in availability of credit, particularly in the mid cap space. Also, capital is harder to access than it was in calendar 2021, which has increased our value proposition for this service line.
On the earnings call debt that we have no plans to change that are there market conditions that might might impact our compensation ratio of course. There is are we in one now no.
So I think we are still comfortable suggesting that we wont change our target and we've been pretty consistent over the last certainly the last several years at maintaining this this tightened range.
And I would add.
Scott Beiser: Historically, in a business rebound we see capital markets improving first than M&A activity follows. We expect this rebound to follow a similar path. Our financial restructuring business had another strong quarter producing revenues of 115 million. While the structuring business continues to benefit from higher interest rates and a fast approaching debt maturity wall, the growth in new business slowed during the quarter, likely a result of improving capital markets. While the US restructuring market has leveled off of debt, causing the slow down in new business activity, we have seen continued strength in our restructuring business in Europe, Asia, and South America, where we believe our brand and market presence is second to none.
The firm's fifth business for 50 years, we've gone through.
Some very bullish cycles in some very bearish cycles, and we have just always partly to the way we think about our business the way, we manage our business the diversity of our business.
The amount of deferrals, we have.
Whether their stock cash et cetera, all of that adds two reasons why we've always had I think a relatively tight range of what our compensation payout ratio is.
And we for the last really several quarters have been in a very consistent ratio.
That's what we'll do for.
Foreseeable future, but as Lindsey mentioned Theres always things I guess, we could never predict that could get us to change or a point of view to properly run the business.
Scott Beiser: As we have said on previous calls, since this restructuring cycle is not the result of a one-off crisis, we expect to experience elevated revenues over the next couple of years, versus a significant revenue spike and subsequent drop as we experience in previous cycles. Financial and valuation advisory produced 71 million in quarterly revenues, down from the same quarter last year, but higher than anything we have reported for FIA in the last three quarters.
Right now, where we're happy with how we're running it and think that the compensation payout ratio that we've been at it for quite a few quarters it feels like the right.
Range that we should be in.
Great. Thank you we appreciate it.
Yeah.
Thank you next question comes from the line of Ken Worthington with JP Morgan. Please go ahead.
Scott Beiser: Our market-neutral service lines continue to perform well in this environment while our service lines that are tied to the M&A markets are lagging previous year results. If the slow but general improvements we are seen in corporate finance and the overall M&A markets produce an increase in M&A closings, we would expect FEA to see positive revenue momentum in calendar 2024. Although we resumed share repurchases this quarter, we continue to take a conservative approach to excess cash in order to give us plenty of balance sheet flexibility to take advantage of acquisitions that may arise.
Hi, good afternoon, and thanks for taking the question I wanted to follow up on the impact of higher long term rates on middle market M&A. So maybe first.
As we think about middle market M&A, what portion of these deals are financed by debt and loans versus equities equity and how does that compare maybe to large scale M&A, so where are the smaller middle market deals financed differently.
And.
Yes, you mentioned in the prepared remarks that the availability of financing or debt financing is improving.
But given that the financial costs are a good bit higher than they were.
Scott Beiser: Also, during the quarter, we had two new managing directors start and believe that the market for hiring senior bankers remains attractive. Over the last seven quarters, our senior hires, acquisitions, and geographic expansions have resulted in significant value being added to our investment banking platform.
056 months ago, and a year ago are you seeing evidence that this higher cost of financing is.
Is having or possibly will have a more lasting sort of negative impact on deal activity as we look out again, maybe over the next six to 12 months. So I think theres a bunch there, but curious to hear your thoughts.
Scott Beiser: We believe we are well positioned for growth as market conditions continue to improve and we are well prepared to maximize that opportunity for the benefit of our employees and shareholders.
Sure Good question Ken.
First of all I think in all of the statistics that we've seen when others do these kinds of surveys.
Lindsay Alley: And with that, I'll turn the call over to Lindsay. Thank you, Scott. Revenues and corporate finance were 282 million for the quarter down 11% when compared to the same quarter last year. We closed 117 transactions this quarter compared to 114 in the same period last year. Although our transaction count increased, our average transaction fee was lower for the quarter versus the same quarter last year. This was a result of deal mix and not the result of any trends in transaction value or fee size.
In a higher interest rate world or a tougher to.
Excess debt capital sponsors.
The sponsors are putting in more equity than they normally would so the percentage of the capital structure now has more equity on a percentage basis than we've seen in some previous years.
That'd be the first comment.
Second comment then tied into that is all things being equal in a higher interest rate world you are going to achieve lower irr's.
Lindsay Alley: Financial restructuring revenues were 115 million for the quarter, the 17% increase versus versus the same period last year. Because 31 transactions in the quarter compared to 24 in the same period last year, but our average transaction fee on closed deals declined slightly. In financial evaluation and advisory, revenues were 71 million for the quarter and 8% decrease from the same period last year. We had 852 V events during the quarter compared to 890 in the same quarter last year.
From kind of a principal standpoint that obviously has some impact on what buyers and sellers I think the valuation is.
What we find is especially in the mid cap space that we participate in is there is a growing number of non traditional banks that are providing that financing and when you look at the amount of raised by sponsors in this.
We will call it private debt capital environment. It is substantially greater today than it ever was several years ago. So we're getting new entrants.
Lindsay Alley: Turning to expenses, our adjusted compensation expenses were 287 million for the quarter versus 301 million for the same quarter last year. Our only adjustment was 9.3 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the second quarter in both fiscal 2024 and fiscal 2023 was 61.5%. We do not expect a change to our long-term target of 61.5% for our adjusted compensation expense ratio. Our adjusted not compensation expenses were 75 million for the quarter and increased to 3 million over the same period last year, but flat from the previous quarter.
The marketplace, yes, it comes with a higher interest rate, yes, therefore, it should have some impact on irr's and valuations.
But ultimately as time goes on I, do believe that buyers and sellers and lenders and borrowers.
Just get closer and closer to seeing the world through the same vantage point and that's what ultimately gets deals done when they have completely different vantage points. That's when deals kind of stalled and so all of those reasons I think we've tried to describe in previous quarterly calls do suggest that people, who are getting closer and closer to that <unk>.
<unk> Liberum point, and therefore, we do see the activity level is.
Lindsay Alley: This resulted in an adjusted not compensation expense ratio of 16.1% for the quarter compared to an adjusted not compensation expense ratio of 14.8% for the same quarter last year. On a per employee basis, our adjusted not compensation expense was 29,000 per employee this quarter versus 30,000 per employee for the same quarter last year. We typically see some seasonality in our adjusted not compensation expenses with the second half normally coming in modestly higher than the first half. We expect that trend to continue this year.
Is increasing still like I said, not probably at the pace that maybe we expected.
Based upon the prior periods, but it is improving.
And one thing I would add Ken is.
If you take a look at the typical houlihan lokey transaction the type of leverage versus equity I'm not sure. It's any different than what our publicly traded peers are doing in terms of.
In terms of levels I think that the significant differences is the participants.
Lindsay Alley: For the quarter, we adjusted out of our non-competition expenses, 3.4 million in non-cash acquisition-related amortization, the majority of which was related to the GCA transaction, and 1.5 million for acquisition-related costs, primarily related to the seven-mile acquisition which is expected to close during our third fiscal quarter. Our adjusted other income and expense decreased for the quarter to income of approximately 2.5 million versus an expense of approximately 1.2 million in the same period last year.
So the larger transactions is likely either high yield or bank syndicate market versus the private credit market in all three behave very differently and the private credit market. In this environment has just been more robust than either the public debt markets or the bank syndicate market and I think that's that's why you might be hearing.
Slightly different views on how the capital markets are doing from a houlihan lokey versus.
Firm that does 345 6 billion dollar transactions.
Perfect. Okay. Thank you very much.
Lindsay Alley: The improvement in this category was driven by higher interest income on our cash balances across the globe as a result of higher interest rates. We adjusted out of our other income and expense, a gain of 816,000 related to the payment of an earn out on a previous acquisition. Our adjusted effective tax rate for the quarter was 28.4%, compared to 27.9% for the same quarter last year. 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.
Thank you next question comes from the line of Ryan kidney with Morgan Stanley. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
So on the non comp side, there was a comment around expecting non comp to be seasonally higher in the second half of the year any color on the puts and takes there and how high a cook at how we should think about the run rate heading into next fiscal year.
No I don't want to give specifics I mean that theres, a fair amount of public information. If you look at over the last five or six years, you'll get a sense COVID-19 was a little unique and the breakdown of non comps. So maybe throw out one or two years. There are 2020 in 2020, one but look at pre Covid and then even last year and take a look at the noncore.
Lindsay Alley: Turning to the balance sheet, as of the quarter end, we had approximately 525 million of unrestricted cash in equivalents and investment securities. As a reminder, we will pay the deferred cash bonus related to compensation in fiscal year 2023 to employees in November, which will significantly reduce our balance sheet cash. In this past quarter, we repurchased approximately 239,000 shares at an average price of a dollar four, $104.33 per share as part of our share repurchase program. We continue to take a conservative approach to share repurchases as we are prioritizing balance sheet strength and flexibility to be able to take advantage of acquisition and hiring opportunities in this market.
<unk> ratio first half versus second half and that's not a bad proxy.
Thanks, and then on the comments around the pace of corporate finance expecting to be a slow exit from this environment is it fair for us to hear that as a more negative tone shift from last quarter and if so where are you seeing the most hesitation. Among your client group is there a certain segment or geography.
I guess the way I would describe it is you know for several quarters now everybody has always felt well next quarter is when we'll start really seen some meaningful improvement and it just feels like it just keeps getting pushed out a little so things are improving.
Unknown Executive: And with that, operator, we can open the line for questions. Thank you.
They're just taking longer to get to that improvement and maybe the pace of the improvement.
Unknown Executive: We will now be conducting a question amount session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line isn't a question queue. You may press star two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions.
The evidence says it's going to be maybe the slower than not necessarily what we thought a quarter ago, but I think what most people probably thought when forecasting and views of a year ago.
We do think that we've kind of hit the trough in this cycle back in the spring time and things have been improving since then.
What we do know not only from ourselves, but from our peers and talking to lawyers.
Brennan Hawken: The first question comes on the line of Brenan Hawking with UBS, please go ahead. Good afternoon. Thanks for taking my question, guys. I wanted to start with the comments on the corporate finance market. So totally appreciate the environment's been challenging and somewhat fluid. But I'm curious about your perspective on sponsors. We're hearing that sponsors have been a bit slow to return to the M&A market. And I'm curious about what you're seeing there. And with this maybe a little bit of caution added to the more positive outlook, do you think that it's reasonable to expect some seasonality here this year in the corporate finance market?
Is kind of pipeline backlogs things that are in the queue.
Our rather significant and it's just.
Just a matter of at what pace that they can eventually get to the finish line. We are not experiencing any abnormal amount of deals that we'll call. It become dead deals are a significant hold deals, they're just still taking longer to get from.
Getting hired to starting to close I think that's the better description and not necessarily that are our view of the markets today are meaningfully different than.
What they were a quarter ago.
So pipeline is building, but lags are longer.
Yes.
Thanks.
Scott Beiser: Brennan Well, I think there's two questions there.
Thank you.
Scott Beiser: I'll take at least the first one on the sponsors. I think we have continued to see really over the last several months and improved interest by sponsors to start doing things with their portfolio companies. We see that in terms of number of pitches that we've participated in. We've seen that in the attendance in our various industry conferences. We've seen that in terms of them asking us to get started. We've continued to hear from them that there is some nudging by LPs to start returning capital and there's issues I think from the employee base of sponsors that they eventually need to start getting back into what we'll call the deal business.
Our next question comes from the line of Steven Chu back with Wolfe Research. Please go ahead.
Good afternoon. This is Brendan O'brien filling in for Steven.
I guess to start I just wanted to follow up on the last question.
It's encouraging that it feels like were.
At the bottom of the worst is behind us in terms of M&A activity and Thats consistent with what we've been hearing at peers, but as we think about that exit rate our exit growth rate from here I know this is a bit of a tough question, but based on what you know today I wanted to get a sense as to when you would think that we can get back to what you would characterize as normal activity levels.
Scott Beiser: Having said all that, there's still not going at the pace that I think we all experienced in the industry three years ago, five years ago, seven years ago. So I went quite say they're exactly at the normal pace yet, but we do think it's improved from where they were three, six, nine months ago.
Well I guess, we'd be in another business, if we really knew that answer but.
One way.
At least I've thought about it is in summer of 2020, you started to see.
A pick up that lasted for probably a good year or year and a half from the <unk>.
Scott Beiser: And on your question on seasonality for as long as I could remember, except for calendar 2022, the December quarter is almost always the best quarter for the industry and not too dissimilar for Houlihan Lokey either. Calendar 2022, the December quarter did not stand out, like other quarters, maybe a host of reasons. And once again, kind of unclear where the lawyers and bankers and the countenance and all the other service providers are they're going to be pushing for various probably compensation or tax related reasons to get something done by this quarter, or will they be more motivated to slip things where they do have control into the next quarter?
<unk> created by Covid.
Maybe the peak in December of 2021.
And much harder to describe what caused that switch from a declining environment to an improving and then a rapidly improving we think the same thing is happening and will happen that we're in the process of improving and things will improve but if you looked at the growth coming from the trough of 2022.
Peak of.
December 2021, we don't think it's going to be at that.
Philosophy might so I guess, that's the best our Crystal ball CS as we see some of the similarities of coming out of this.
Doldrums, it just not going to come out at the same maybe a super pace that it came out.
Scott Beiser: I don't know. We know what historically has happened, and we also know that calendar 2022 was the operation. And I guess we'll find out pretty soon what calendar 2023 holds. Yeah, that's fair. Thanks. Thanks for that's got.
Three years ago.
Gotcha.
That's helpful context, and then I guess on restructuring I know in the past you've pointed to that $120 million or so run rate as being the right level for the next year or so.
Scott Beiser: And when we think about the the md count in corporate finance, notice that it was down quarter of a quarter, maybe speak to what drove that decline and whether or not you'd expect that to continue or we know what was behind that slip. So what I think we do, like in every year, and remember we're a March 31 company. So it's that time period where we are talking to always a small subset of our mds that maybe we think they're in the wrong platform are performing the love we'd like.
You noted in your prepared remarks that activity has slowed which makes sense given the improvement in capital markets. So I just wanted to get a sense as to whether and I'm like significant improvement in the capital markets environment could potentially present, a risk to that $120 million run rate or is the debt maturity of on some of the dynamics you spoke to earlier.
Enough to sustain that.
Into 2024 and beyond.
Scott Beiser: And there is some involuntary departures as well. And then they typically occur some in the June quarter, some in the September quarter. So I think that's just the normal year end component offsetting that is obviously we we promoted a number of mds in April. We hired a number of new mds in that the June quarter as well as the September quarter. And much like others in the industry, we have other offers that have been accepted, but they just have not started yet.
You know I'd say two things.
One doesn't necessarily make a lot of logical sense to us and why theres been a bit of a slow down in restructuring new activity in the U S. Because we think the macro factors impacting it are still there nothing nothing is hugely change on the capital market improvement side.
You start with the worst of all fact patterns for corporate finance is when the capital markets are not open as we've described but we do think there are open now.
Scott Beiser: So effectively our headcount is pretty similar over the last really year. And I think it's just a little bit of typical transition of some departures and then you know filling in with incremental either through promotions or external high runs.
But it's not necessarily hugely helpful to restructuring.
Brennan Hawken: Great. Thanks for the color. Thank you.
Alright, I should say hugely.
It doesn't cause restructuring business to go down because while the capital markets are more open and continue to open more you're still just have a higher interest rate than what people would be refinancing that so I don't see I'll call. It of what we would expect is normalization for the while and the capital markets as being a.
GM Seattle: Next question comes from the line of GM Seattle with Goldman Sachs, please go ahead. Good afternoon, Scott Lindsay, and thanks for taking my questions. Maybe we can just start with restructuring, which was a little bit weaker in the quarter than I think the quarter before, but against this, obviously rates continue to rise. So how do you think about the move in the long end of the curve, and its impact on restructuring, and do you think the opportunity set has improved?
Detriment to the restructuring environment because of where interest rates are have a different conclusion. If you somehow thought the feds were going to bring interest rates down substantially and close to where they were two years ago, which is not what anybody is expecting but if that were to happen we'd have a different tone and view on restructuring.
Got it that makes sense. Thank you for taking my questions.
Scott Beiser: I think it's pretty hard to make a case that things do not look good for the restructuring industry, for at least the next couple of years, just on where certain businesses are performing, where interest rates are, get the maturity wall, a whole host of dynamics. We've always found that that business, at least for us, is probably the most lumpy, or sometimes you get more sizable projects that may close in one quarter versus another.
Yeah.
Thank you.
<unk> to all the participants stuck in my press Star one to ask a question.
Yeah.
Okay.
This concludes today's question and answer session I would like to turn the floor back over to Scott Beiser for closing comments.
I want to thank you all for participating in our second quarter fiscal year 2024 earnings call and we look forward to updating everyone on our progress when we discuss our third quarter results for fiscal 2020 for this coming winter.
Scott Beiser: We did note in our remarks, there was a bit of a slowdown in new business activity, albeit was only in the United States. I think it continues to ramp up in other parts outside of the United States, and we expect that we will be operating at this higher level for the foreseeable future, and as you mentioned, yes, a continuation of the theme now probably and interest rates, which might be higher for longer. Net net is good for the restructuring environment.
Yeah.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
Yes.
[music].
GM Seattle: Okay, thank you, and then as a follow-up, you know, M&A continues to, you know, maybe it's about the trough, it's increasing slowly, however you want to think about it, but, you know, I would imagine that perhaps opens up the window for you to contemplate more acquisitions as some of those smaller firms, you know, haven't seen revenue recover.
Lindsay Alley: So maybe you just talk about, you know, how you're thinking about the potential for, you know, bolt-ons from here.
Lindsay Alley: Linda, do you want to cover that? You've been talking to a number of the acquisition targets we've been up to, so we need. Sure, look, I think the pipeline is as robust as it's ever been. I think the longer this M&A recession, if you want to call it that, continues as you suggested. The tougher it is on smaller firms that don't have a restructuring practice in particular. But I think for us, it's very important we don't rush it.
Lindsay Alley: You know, we are acquisition processes is usually a long one. We like to know the management teams, we like to make sure that there's a good culture of fit, and there's normally a, you know, process of the lack of a better word dating that we go through, and we're doing that, and we're not rushing it given the circumstances. So, I think acquisitions will continue to be an important part of our non-organic growth. It does provide some opportunities in a market like this, but we do have to move at a speed that makes sense for both parties, and we continue to do that. That's very clear.
GM Seattle: Thank you.
Alex Jenkins: Next question comes from the line of Devon Ryan with GMP Security. I hope you guys are pleased to go ahead. Hey guys, this is Alex Jenkins, stepping in for Devon Ryan. Hope you guys are doing well. I guess just to follow up on that restructuring question, obviously we've been talking a lot about maturity wall coming in 24 and 25. Can you just talk about how you're proactively getting ahead of clients and what the catalyst is going to be for them to take action?
Alex Jenkins: Meaning should we expect a flurry of activity leading up to that? Or will we see a step of function of activity as time kind of runs out? Thanks. I think, consistent with our comments that just isn't the crisis mode, it's just a, probably a little bit of playing catch up, as well as just a higher interest rate world. I think you're going to see more of a steady flow of business. And, you know, some companies more proactively early on will try to do things before they hit that maturity walls.
Alex Jenkins: Some take a little longer. I think the major difference today versus what we've seen over the last couple years, there is an ability to do refinancings that maybe didn't even exist six or nine or 12 months ago, but refinancings are at a higher interest rate. So it doesn't necessarily solve their problem. And I think we continue to chat with companies that we know maybe have some struggles in their business plan and their financial results and a balance sheet which in today's world and today's interest rate causes them to need to come to some solution.
Alex Jenkins: And this is the reason I think the industry will just have some elevated results in restructuring for the next couple of years. Sure. That makes sense. I think for that color, I guess as a follow-up, just on the expenses, you guys have enabled the whole deline on expense ratios, particularly relative to your non-middle market peers. If the M&A market doesn't recover to UC scenario where you might have to take that copyright show structurally higher, or is this just an example of the difference of your business models?
Alex Jenkins: Thanks for the time. You know, I think it's probably the latter. I mean, we do have some structural differences that allow us some flexibility in how we run the compensation ratio. And in market conditions like the one we're in, we're clearly confident enough to suggest the earnings call that we have no plans to change that. Are there market conditions that might impact our compensation ratio? Well, of course there is. Are we in one now?
Alex Jenkins: No. And so I think we are still comfortable suggesting that we won't change our target. And we've been pretty consistent over the last, certainly the last several years at maintaining this target range. And I would add, you know, the firm spent business for 50 years, we've gone through some very, you know, bullish cycles and some very bearish cycles. And we have just always partly to the way we think about our business, the way we manage our business, the diversity of our business, the amount of defaults we have, whether they're stockcaches, and all of that adds to reasons why we've always had, I think, a relatively tight range of what our compensation payout ratio is.
Alex Jenkins: And, you know, we've, for the last really several quarters have been in a very consistent ratio. Expect that's what we'll do for, you know, for the foreseeable future. But, as Lindsay mentioned, there's always things I guess we could never predict that could get us to change our point of view to properly run the business. But right now we're happy with how we're running it, and I think that the compensation payout ratio that we've been at for quite a few quarters feels like the right, you know, range that we should be in. Great. Thank you, we appreciate it. Thank you.
Ken Worthington: Next question comes on the line of Ken Worthington with JP Morgan, please go ahead. Hi, good afternoon and thanks for taking the question. I wanted to follow up on the impact of higher long-term rates on middle market M&A, so maybe first, as we think about middle market M&A, what portion of these deals are financed by debt and loans versus equities equity, and how does that compare maybe to large scale M&A? So are the smaller middle market deals financed differently?
Ken Worthington: And I guess you mentioned the prepared remarks that the availability of financing or debt financing is improving, but given that the financial costs are good that higher than they were five, six months ago and a year ago, are you seeing evidence that this higher cost of financing is having or possibly will have a more lasting sort of negative impact on deal activity as we look out again, maybe over the next six to 12 months. So I think there's a bunch there, but curious to hear your thoughts.
Scott Beiser: Sure, good question, Ken. First of all, I think in all the statistics that we've seen when others do these kinds of surveys in a higher interest rate world or a tougher to access debt capital, sponsors are putting in more equity than they normally would. So the percentage of the capital structure now has more equity on a percentage basis than we've seen in some previous years. So that would be the first comment.
Scott Beiser: The second comment then tied into that is all things being equal in a higher interest rate world. You are going to achieve lower IRRs from kind of a principal standpoint that obviously has some impact on what buyers and sellers think the evaluation is. What we find, especially in the mid cap space that we participate in, is there is a growing number of non-traditional banks that are providing that financing. And when you look at the amount of raised by sponsors in this, we'll call it private debt capital environment.
Scott Beiser: It is substantially greater today than it ever was several years ago. So we're getting new entrants into the marketplace. Yes, it comes with a higher interest rate. Yes, therefore it should have some impact on IRRs and valuations. But, closer to seeing the world through the same vantage point. And that's what ultimately gets deals done when they have completely different vantage points. That's when deals kind of stall. And so all of those reasons I think we've tried to describe in previous quarterly calls do suggest that people are getting closer and closer to that equilibrium point.
Scott Beiser: And therefore we do see the activity level is increasing still, like I said, not probably at the pace that maybe we expected based upon the prior periods, but it is improving. And one thing I would add, Ken, is, you know, if you take a look at the typical Hula-Henloki transaction, the type of leverage versus equity, I'm not sure it's any different than what our publicly traded peers are doing in terms of in terms of levels.
Scott Beiser: I think the significant difference is the participants. The larger transactions is likely either high-yield or bank syndicate market versus the private credit market. And all three behave very differently. And the private credit market in this environment has just been more robust than either the public debt markets or the bank syndicate market. And I think that's why you might be hearing slightly different views on how the capital markets are doing from a Hula-Henloki versus a firm that does $3, $4, $5, $6,000,000 transaction.
Ken Worthington: Okay, thank you very much.
Ken Worthington: Thank you.
Ryan Kinney: Next question comes from the line of Ryan Kinney with Morgan Stanley, please go ahead. Hi, good afternoon. Thanks for taking my question. So on the non-com side, there's a comment around expecting non-com to be seized only higher in the second half of the year. Any color on the puts and takes there and how high I could get, how we should think about the run rate heading into next fiscal year? Yeah, I don't want to give specifics.
Ryan Kinney: I mean, there's a fair amount of public information if you look at over the last five or six years, you'll get a sentence. COVID was a little unique in the breakdown of non-coms and maybe throughout one or two years. There are 2020 and 2021, but you know, look at pre-COVID and then even last year and take a look at the non-comperatio first half, first and second half. That's not a bad proxy.
Ryan Kinney: Thanks.
Ryan Kinney: And then on the comments around the pace of corporate finance expecting to be a slow exit from this environment, is it fair for us to hear that as a more negative tone shift from last quarter? And if so, where are you seeing the most hesitation among your client group? Is there a certain segment or geography? I guess the way I would describe it is, you know, for several quarters now, everybody has always felt, well, next quarter is when we'll start really seeing some meaningful improvement.
Ryan Kinney: And it just feels like it just keeps getting pushed out a little so things are improving. They're just taking longer to get to that improvement and maybe the pace of the improvement, the evidence just says it's going to be maybe the slower than not necessarily what we thought a quarter ago, but I think what most people probably thought, you know, when forecasting and views of a year ago, we do think that we've kind of hit the trough in this cycle, you know, back in spring time and things have been improving since then.
Ryan Kinney: What we do know, not only from ourselves, but from our peers and talking to the lawyers, is kind of pipeline backlogs, things that are in the queue, are rather significant. And, you know, it's just a matter of a what pace that they can eventually get to the finish line. We are not experiencing any abnormal amount of deals that will call become dead deals or significant hold deals. They're just still taking longer to get from getting hired to starting to close. I think that's the better description and not necessarily that our view of the markets today are meaningfully different than, you know, what they were a quarter ago. So pipelines building, but lags are longer. Yes.
Scott Beiser: Thanks.
Stephen Chewback: Thank you.
Brendan: Next question comes on the line of Stephen Chewback with Wolf Research. Please go ahead.
Brendan: Good afternoon. This is Brendan and Ryan Phillian for Stephen. I guess the start I just wanted to follow up on the last question. You know, it's encouraging that it feels like we're at the bottom or the worst is behind us in terms of having an activity and that's consistent with what we've been hearing at peers. But as we think about that exit growth rate from here, I know this is a bit of a tough question, but based on what you know today, I wanted to get a sense as to when you think that we can get back to what you would characterize as normal activity levels.
Brendan: I guess we'd be in another business if we really knew that answer but one way at least I thought about it is in summer of 2020 you started to see a pickup that lasted for probably a good year or year and a half from the, you know, the trough created by COVID to maybe the peak in, you know, December of 2021. That caused that, you know, switch from a declining environment to an improving and then a rapidly improving.
Brendan: We think the same thing is happening and will happen that or in the process of improving and things will improve but if you looked at the growth coming from the trough of 2020 to the peak of December 2021, we don't think it's going to be at that, you know, velocity if you might. So I guess that's the best our crystal ball sees is we see some of the similarities of coming out of this more goldrums.
Brendan: It's just not going to come out at the same maybe super pace that it came out, you know, three years ago. That's helpful context and then I guess on restructuring, known the past, you pointed to that 120 million. So run rate is being at right level for the next year or so. However, you know in your prepared remarks that activity is slowed, which makes sense given the improvement in capital markets. So I just wanted to get a sense as to whether an improvement, like significant improvement in the capital markets environment could potentially present a risk of a 120 million dollar run rate or is the debt maturity wall and some of the dynamics you spoke to earlier enough to sustain that, you know, into 2024 and beyond.
Brendan: You know take two things. One, it doesn't necessarily make a lot of logical sense to us and why there's been a bit of a slow down in restructuring new activity in the US because we think the macro factors impact in it are still there. Nothing, nothing has hugely changed on the capital market improvement side. You know, you start with the worst of all fact patterns for corporate finances when their capital markets are not open as we've described.
Brendan: And we do think they're open now, but it's not necessarily hugely helpful to restructuring or I should say hugely, you know, doesn't cause restructuring business to go down because while the capital markets are more open and continue to open more, you still just have a higher interest rate than what people would be refinancing that. So I don't see how color what we would expect is normalization for the while in the capital markets as being a detriment to the restructuring environment because of where interest rates are.
Brendan: It have a different conclusion if you somehow thought the feds were going to bring interest rates down substantially, you know, in close to where they were two years ago, which is not what anybody is expecting. But if that were to happen, we'd have a different tone and view on restructuring. Got it. That makes sense. Thank you for taking my questions. Thank you. A reminder to all the participants that you may press star 1 to ask, question.
Unknown Executive: This concludes today's question and answer session.
Scott Beiser: I would like to turn the floor back over to Scott Beiser for closing comments. I want to thank you all for participating in our second quarter fiscal year 2024 earnings call and we look forward to updating everyone on our progress when we discuss our third quarter results for fiscal 2024 this coming winter.
Unknown Executive: Thank you.
Unknown Executive: This concludes today's teleconference. You may disconnect your lines at this time.
Unknown Executive: Thank you for your participation. .