Q2 2025 Houlihan Lokey Inc Earnings Call

Speaker Change: Good day ladies and gentlemen, thank you for standing by welcome to the Hula Hand Loki, second quarter fiscal year 2025 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 30, 2024. I will now turn the call over to the company.

Speaker Change: Thank you, operator, and hello everyone. I now, everyone should have access to our second quarter fiscal year 2021-5 earnings release, which can be found on the Hula Hand-Loki website at www.hl.com in the investor-relation section.

Before we begin our form of 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 on not guarantees of future performance.

and statements are subject to numerous risks and uncertainties that could cause actual results that differ materially from what we expect. And therefore, you should exercise caution when interpreting and relying on them.

Speaker Change: We refer all of you to our recent SEC five links 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 10Q for the quarter-ended September 30, 2024, when it is filed with the SEC.

Speaker Change: During today's call, we will discuss non-gap financial measures which we believe can be useful in evaluating the company's financial performance.

Speaker Change: These measures should not be considered an isolation or as a substitute for our financial results prepared in accordance with the gap.

A reconciliation of the use measures for the most directly comparable gap measures is available in our earnings release and our investor presentation on the hl.com website.

Speaker Change: hosting the call today. We have Scott Adelson, who will hand Loki's chief executive officer and Lindsay Alley, chief of the natural officer. They will provide some opening remarks, and then we will open the call to questions. And with that all turn the call over to Scott.

Scott: Thank you, Christopher, and welcome everyone to our second quarter, fiscal 2025 earnings call.

Scott: We ended the quarter with revenues of $575 million and adjusted earnings per share of $1.46. Revenants were up 23% and adjusted earnings per share were up 32% compared to the same period last year.

We are pleased with our results for the quarter and we enter the second half of the year with momentum across all three of our business lines.

Corporate finance continues to benefit from improvements in the M&A markets, and we expect the second half of the year to follow this trend. The natural restructuring had a strong second quarter as it continues to benefit from record, leverage, and still elevated interest rates.

Scott: and our financial and valuation advisory group experienced growth in our market neutral services, as well as developing demand for those service lines affected by an improving M&A environment.

Well, we are optimistic about the second half of our fiscal year. We recognize the challenges posed by the current macro environment. Interest rates, the lower-than-recent peaks remain high.

and it may take time to feel the effects of lower interest rates on our clients' financial performance.

Scott: Geopolitical Volatility, particularly the potential for a wider conflict in the Middle East and Ukraine and the US presidential elections, all add layers of complexity to our outlook.

Despite these risks, we continue to experience a steady upward trajectory for markets and the business environment.

Scott: 4th of the Annsepher juice, 364 million in revenues for the quarter, representing a 29% increase over last year's second quarter. Key metrics for our corporate finance business continue to improve, and new business generation remains strong.

Since Labor Day, we have seen an increasing number of companies choosing to go to market. A trend we expect to continue. While this trajectory of deals coming to market is positive, we continue to experience longer timelines to close these transactions.

Scott: So, while transaction velocity is improving, it is doing so at a slower pace than in previous recoveries.

Additionally, within corporate finance, our capital markets business performed very well in the quarter, bolstered by strength and private capital and the successful integration of our triaglaposition.

The National Restructuring Produced 132 million in revenues for the second quarter, a 15% increase versus the second quarter last year.

Re-enforcing our view that the restructuring markets remain elevated. New business activity was particularly strong, driven by a combination of large cap and middle market opportunities.

This heightened activity is expected to benefit our restructuring business well into fiscal 2026.

Additionally, as market conditions continue to improve, we are prepared for some restructuring activity to turn into healthy refinancing activity, which we are well positioned to execute on behalf of our clients.

Scott: The natural and valuation advisory produced 79 million in revenue for the second quarter, a 12% increase versus the second quarter last year.

Scott: Performance and Hindus to be driven by our non-cyclical business lines, particularly portfolio valuation.

We observed an uptick in new business generation in the first half of the year compared to the same period last year and demand for MNA related services is starting to rebound.

Regarding acquisitions, we recently announced the closing of our acquisition of Platonia Solutions.

The Tanya is a tech-enabled valuation platform based in the UK, specializing in structured products.

Britannia will be integrated into our financial and valuation advisory business and will complement our highly successful portfolio valuation group. We send it warm welcome to all our new colleagues joining as a result of this transaction.

During the quarter, we announced the acquisition of Waller Helms, which will significantly expand the depth and breadth of our financial services industry group, especially in the insurance and wealth management sectors.

Areas that are highly active for private equity.

This acquisition will create new synergies and strengthen our coverage of these sectors, with 48 new financial professionals, including 13 managing directors. The acquisition is on track to close by the end of the calendar year.

Scott: Deferently, we hired three new managing directors this quarter as we continue to take advantage of an act of hiring market, particularly in corporate finance.

Scott: Our outlook for the second half of fiscal 2025 remains positive. We continue to reap the benefits of a balanced and highly diversified business model.

The improving M&A sentiment strong capital markets and sustained strength in our restructuring business are all encouraging indicators with the most talented workforce in our history.

We are diligently working to capitalize on the markets recovery as an unfolds. With that, I'll turn to call over to you, Lindsay.

Thank you, Scott. Revenue is in corporate finance with $364 million for the quarter. A 29% compared to the same quarter last year. We closed the 130 to 1 transactions this quarter, up from 117 in the same period last year, under average transaction fee also increased.

The Metro Restructuring Revenors were 132 million for the quarter. If 15% increase versus the same period last year, we closed 33 transactions this quarter, compared to 31 in the same quarter last year, and our average transaction fee on closed deals also increased.

Scott: As we've mentioned in the past, revenues in our financial restructuring business can be lumpy, quarter to quarter, and this quarter benefited from some larger transactions.

For financial unvaluation advisory, revenues were 79 million for the quarter, a 12% increase from the same period last year. We had 933 fence during the quarter, compared to 852 in the same period last year.

Turning to expenses are adjusted compensation expenses with $354 million for the quarter versus $287 million for the same quarter last year. Only adjustment was $7 million for deferred retention payments related to certain acquisitions.

are adjusted compensation expense ratio for the second quarter in both fiscal 2025 and 2024 was 61.5%. And be expect to maintain our long-term target of 61.5%. For this ratio.

Scott: are adjusted non-competition expenses were 81 million for the quarter and increased of 7% over the same period last year.

Scott: This resulted in an adjusted 9-puppetation expense ratio of 14.1% for the quarter, compared to 16.1% for the same period last year.

Scott: On a poor employee basis, our adjusted non-competition expense was 31,000 this quarter versus 29,000 for the same quarter last year.

For the quarter, we adjusted out of non-competition expenses, 2.1 million in non-cash acquisition-related amortization.

Scott: We also had an adjustment of approximately 700,000 per cany to professional fees associated with streamlining our global organizational structure refer to as Project Solo.

are just at other income and expense produced income of approximately 5.4 million, versus income of approximately 2.5 million in the same period last year. The improvement in this category was primarily due to a net increase in interest income.

Our adjusted effective tax rates to the quarter was 31.3%, compared to 28.4% to the same quarter last year. The increase in our effective tax rate was primarily a result of increased state taxes and increased taxes due to foreign operations.

Scott: A long-term target range for our adjusted effective tax rate is between 28 and 30%. And we expect the school of 2025 to end up at the high end of that range.

Turning to the balance sheet, as of quarter end, we had approximately 748 million of unrestricted cash and the equivalent and investment securities. As a reminder, we will pay our deferred cash bonuses related to fiscal year 2024 and November, which will reduce our balance sheet cash.

With that, operator, we can open the line for questions.

You will now begin the question and answer session. Do ask the question, you may press star, then one on your touchtone phone.

If you are using a speaker phone, please pick up your handset before pressing the keys.

Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then too. At this time we will pause for just a moment to assemble our roster.

Speaker Change: And our first question today comes from James Yarrow with Goldman Sachs. Please go ahead.

Good afternoon and thanks for taking my questions. Maybe just starting on corporate France, which obviously had best in class trends both here and here and quarter on quarter.

As you think about the outlook from here,

In the near term is there any risk of less than normal seasonality in the calendar fourth quarter, and then a longer term, how we should think about the trajectory from here, is there anything in your view that could catalyze a notable acceleration other than perhaps the election?

and then good question as always, thank you. I think if you look at it, it's very consistent with what we have been talking about.

and things have been improving month of a month, quarter of a quarter, and it's really all in about what's been the velocity of that improvement in corporate finance. And I think we've just continued to see it improving. There, obviously, we, in our statements, recognize there are a number of external factors that could affect that, not at least at which positive or negatively would be the election. But also the, the conflicts around the world, and we, we recognize that.

Speaker Change: and we do continue to see things going to market on a more regular basis and things moving along. But as we said, it is still an elongated period to close that part. It won't get any shorter, still not in the normal range.

Thank you Scott. Maybe just quickly on the prytanious solutions, transaction. Anything more that you could just add on this GDG rationale, maybe where the business operates, potential synergies that you see and anything else that we should be thinking about to help us understand the transaction.

Yeah, happy to do that. It's really, um, or pleased about this, you know, opportunity. I mean, it is an addition to our portfolio evaluation business, which we think is a really wonderful business. And...

It is much more tech enabled than the bulk of our portfolio valuation. Businesses, although we do have components of it that are similar.

We just believe that they have

and really superior technology and we are excited about the opportunity to deploy that initially within our portfolio of evaluation area and we believe there may be opportunities that will be applicable in other areas over time.

and other benefits to that business is a few-day based on a lot of their clients are focused on non-US geographies. And so it is a kind of a nice step in growing that business or continuing to grow that business outside the US.

Speaker Change: Thank you so much.

And our next question today comes from Brennan Hawken with UBS. Please go ahead.

Brennan Hawken: Hi, thanks for taking my questions. I'd like to follow up maybe on that last point on PSL. So this is the first FVA deal I think that...

Brennan Hawken: We've seen, so you know, helpful to get that fleshed out a little bit. It sounds like this is going to be sitting in largely that recurring portion of the FCA. Is that right and and perform a for this deal? What percentage of that FCA revenue do you expect we're occurring?

Yes, Adley.

Thanks for the question and the answers you actually are correct that is where we'll sit and that it is the recurring portion of the revenue and that is another reason we do like it quite a bit. It is not going to materially change our results, it's not a bit that scale today but we believe that it will contribute over time in a more meaningful passion. And to answer your somewhat subtle question, Brennan, it will continue to be a recurring business similar to the way it was prior to the transaction.

Thank you for picking up on

The subcats. Okay, Scott, I think you also had some comments in your favorite remarks around restructuring and that it's looking good and will continue to look good likely in the 226. But also you touched on...

something that I wanted to ask about actually which was the idea that some of those restructuring mandates to...

The Bankers have been working on are probably going to be showing up in capital markets revenues because you guys both based on product So is that right and if we adjust for that?

Would you be continuing to see Restructuring Gross? Here's this year, just because that's probably a better indication around where the strength of the business and the resilience of the business.

Thanks. I think the operative word there was could be, right? I mean, I think you may be reading a little too much of that. We are continued to see.

Strong Activity in Restructuring in the Quarter and that will have, as you know, due to the time frame of it that will.

Brennan Hawken: Continuon into the future will soon be met up to that.

It is just a general statement that as we get later in a cycle, we recognize that there is the possibility of that occurring. It is not a statement that there's something in particular that's happening or happening more regular or anything like that.

Speaker Change: Okay, got it. So the outlook on restructuring in your expectations, even they came in above that range That's an average range, aren't changing for the year. Is it just a bit of a quarter of a time?

Speaker Change: Correct, it was a good quarter which is getting, you know, it continues to give us confidence in it.

Just a staining at the elevated levels of the night. Yeah, I'd say that be...

The only other thing that we mentioned is the activity levels is quarter or strong and that builds well for our thief. This is kind of higher and longer. Higher for longer. For the restructuring activity.

and the other is Charles Yamarone.

Speaker Change: Okay, thanks so much.

Our next question today comes from 8 in Hall with KVW. Please go ahead.

and the other side of the screen.

Speaker Change: Thanks, good afternoon everyone.

Speaker Change: noted it in your paratroomark market business performed well with the strength and private capital, also the integration of the Triago transaction.

So wondering if there's any update as to how we should be thinking about the contribution of this business, the corporate finance line, just given the recent additions?

Yeah, look, I think we continue to sort of suggest to the market that you should think of that business as between 15 and 20% of our corporate finance revenues in any given year. You know, the capital market business over the last couple of years has done quite well. We are starting to see momentum in the M&A business, Scott suggested, and so depending on how fast the M&A business recovers, your stills.

Speaker Change: So, likely looking at that range that we've always told to the market.

Okay, Scott Adelson, I appreciate the color there.

Speaker Change: Maybe just follow up on PSL, understand the specialty is in structured credit there.

Maybe how is this technology being utilized across other asset classes or verticals? And maybe you can just touch on a little more granular, the opportunity and kind of integrating that to the broader platform.

Speaker Change: Yeah, I mean I...

It is an area that we think there will be applicability over time and I think that it's really truly frustrating at intending details on how we really think that it will play out but we recognize.

Speaker Change: The data is in the area of our business that already utilizes a meaningful amount of technology and we think this is particularly good technology and will only be added into what we are already doing.

Thank you for seeing my questions.

And our next question today comes from Devon Ryan with Citizens JMP. Please go ahead.

Speaker Change: Hey guys, this is Alkshank and Fennel for Devon Ryan. Congrats on the nice quarter. I guess just to start off the MB head count over the last four quarters or so obviously went down a little bit. This quarter, but you best basically been growing at the low single digits.

and maybe you could just touch on the environment, competitive dynamics and how we should think about frame and out, senior talent going forward over the next year or so.

I think that when you think that MD had come from our perspective, it's a couple of things. It is obviously our annual process of promoting people, that's one piece of it you have.

We are fairly, retroly, repent and certainly right now in the market looking to acquire additional.

Speaker Change: Individuals, and we do that as we stated in the quarter-high of three new people and then we have the acquisitions.

Now, as we've said before, we also do have some number of people both in acquisitions and other ways that don't wind up being as good a fit as in some cases we might have hoped, but me.

that number winds up netting over time, but overall it has been a growing number.

Okay, all right, I appreciate that. And then maybe a follow up. Hopefully this is the last question that you have to answer on the election, but obviously work with a lot of small businesses. Can you speak to their sentiment as we head into this election? What might happen once we get past election day and just generally where the puts and takes?

Speaker Change: of these two administrations, so as we relate to activity for your business. Thank you.

I think you can pretty well bet that there's individuals on both sides of that equation that believe in each side of the set of possibilities will be beneficial to them and I think that we really have seen as people continuing to move forward.

on transactions and deploying capital and kind of regardless no longer waiting if you will to see what's going to happen and I think that that is your seeing map both in our results in our statements about things to continue to move forward.

Yeah, I mean just to add that, I think, you know, in the make-up space, we tend not to have the same regulatory pressures on our transactions that a lot of our publicly traded peers in the BOLDS bracket have. And so that is a big topic in the selection that really doesn't have an impact on us.

The other is we're highly diverse by the cross-industry so healthcare may be the benefit from X, Y, V, Win in the election and industrial, the other person. And so we're, I think, diversified enough across industry where there's not one theme underlying, you know, what's better for us if someone wins. And then I think, you know, third is for us.

Speaker Change: Probably what happens to Capitol Games is probably the most important topic through a lot of our clients because we do deal with a lot of entrepreneurs and I think at the minimum people think the government's going to be split and so the idea of movement in Capitol Games is probably not a huge risk coming into this election, so we've got to mix all that in the bowl and that's...

What we're thinking about the election. The other thing I would add to what the DC said we also have a geographic thing So obviously we sitting here in the United States are very fixated on our election, but it's a big world out there

Sure, that makes sense, thank you guys for that color, appreciate it.

Speaker Change: And our next question today comes from Brendan O'Brien with Wolf Research. Please go ahead.

Good afternoon and thank you for taking my questions. I guess the start I just wanted to touch on, you know, tap a allocation. You guys have done quite a few deals over the past year too.

but just want to hear the sentences to what the acquisition pipeline is looking like today. Whether there is any need to take a bit of a breather here to focus on integrating all the deals that you've done recently and how that is influencing your thinking around Capitol Return and by-box.

Yeah, I mean, I'll let Lindsey take the five actors, but they...

Speaker Change: We are always in dialogue as we have stated before this is a part of our strategy and we will continue to do acquisitions. When they come in, when they hit, it's lumpy to use a term that went to use earlier.

While there have been a few recently in short order, that doesn't mean that it will continue with that pace.

But we are, we are constantly looking when we find things that we think are a good fit and will be beneficial to the organization and our shareholders. We will continue to work on doing them. So that process will continue. Yeah, and from the thinking of the overall pipeline of the MNA, the fact that we've had sort of three deals here in the last six months or eight months.

He there announced or closed, that hasn't affected the pipeline. It's kind of robust that it's been for years, frankly. In terms of capital allocation,

I don't think our position has changed any, you know, we, we, we

Speaker Change: are dividend as our priority and I'd say acquisitions is second and then maintaining share values would be third and I think we've done a pretty good job in all three. You know, we haven't been in the open market making share purchases but we also have quite a few with whole-to-cover transactions that we do throughout the year and the big one being in May and so we've generally kept our share account flat without having to go to open market and I think frankly we like to keep that flexibility in our balance sheet as these acquisitions come about.

Let's create them. From my follow-up, I want to touch on sponsors. From the data that I can see, it's pretty apparent that there's been a bifurcation in default rate and liability, default rate, and liability management activity between corporate and sponsor back.

Companies with sponsored defaults and liability management activity continuing to increase this corporate default rates have moderated.

How much is the stress among sponsor portfolio companies been ahead when activity? And do we need to see these pressures of big before sponsor amenate activity like hit-s-normalized levels?

I mean, I don't disagree with some of your sentiments that has not been something that there has been a driver there. You gotta remember, most of the sponsors that we deal with have a number of poor political companies.

and that is, that may be a problem for an individual partner in that fund who is running that particular deal, but the entire portfolio, it'll factor that prime and equity firm. They're not.

Speaker Change: I'm so focused on one particular, if you will, sick balance sheet that they're keeping them from managing and growing and exiting their successful operations. So I mean, I think that you're with Matt's on something and I would say we have seen.

Speaker Change: Great, thank you for taking my questions.

Speaker Change: Court of Experiments.

Again, if you have a question, please press star and then one.

Speaker Change: In our next question today, comes from Kenneth Worthington with JP Morgan. Please go ahead.

Hi, this is Alex Bernstein on African. Thanks for watching our question

One of the double click on restructuring, I know you mentioned that some of the processes were taking longer to close, this quarter was strong in part due to the timing and that your pipeline going ahead.

Speaker Change: and I want to thank the different industry environment, obviously we've had a significant rise in rates over the past.

and four years in that semester in a date and continuing to date.

wanted to get your thoughts on how that impacts the rate cycle that is the types of restructuring opportunities you're seeing.

and as the pipeline continues to build today, due to those building blocks look different and they did say 18 or 12 months ago. Thanks so much.

I want to make sure that clarifying or understanding my students, so I'm talking about a long-gated timeframe that is really relating predominantly to corporate finance business, more on the healthy side. I believe your question is relating to the restructuring business and interest rate to my understanding your question correctly.

That's right, thank you.

and I think it is.

We are still and an elevated

Interest Rate Empowerment, and I think that this quarter in the activity levels of we...

Habsene and Continuously are an indication.

that there are still a number of sick balance sheets out there that need to be dealt with in some form or another. And we expect that to continue as we've stated for the foreseeable future.

Thanks, then, just maybe one more. I think about the capital market business and as that, it continues to grow. To start this year, there's of course.

A pre-significant wave of refining, refining activity in the market body. To some extent, much of that was driven by...

to fact that the public market is largely closed. In the dead side, you had a lot of private credit funding that was going on to balance sheets at more expensive rates.

and then a lot of that was flowing through and changing to the public markets.

and the task handful of quarters. Does that elevated level of activity impact what you're seeing in the capital market business and how are you looking at that going forward? As that looks to be making a sway through the system now, Brad Marky was.

Speaker Change: Yeah, I mean we have, we believe the largest private capital solutions group out there and we have been very fortunate that that group has been busy continues to be busy. Private capital obviously as it as a asset classes continue to grow significantly.

and we have benefited from that growth clearly and that's not something that we see subsiding any time soon. And just given our average transaction size,

The public market's opening up is in having a huge impact on our private capital business. Remember, we're primarily in the middle market.

and that little market, the option of sort of the public markets are generally not available to them. It's just too small. And so we welcome the public market opening and even the bank market opening. But we don't think that has a huge impact on our private capital business.

Speaker Change: Make some unexpected doubts in case, thanks again, appreciate it.

Speaker Change: Thanks for watching!

Speaker Change: Includes our question and answer session. I would like to turn the conference back over to Scott Adelson for any closing remarks.

We want to thank you all for participating in our second quarter fiscal 2025 earnings call. We look forward to updating everyone on our progress when we discuss our third quarter results for fiscal 2025.

This coming winter. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.