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Edited Transcript of GHL earnings conference call or presentation 5-Nov-19 9:30pm GMT

Q3 2019 Greenhill & Co Inc Earnings Call

NEW YORK Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Greenhill & Co Inc earnings conference call or presentation Tuesday, November 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Patrick J. Suehnholz

Greenhill & Co., Inc. - Director of IR and COO of Investment Banking & Principal

* Scott Lee Bok

Greenhill & Co., Inc. - Chairman & CEO

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Conference Call Participants

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* James Edwin Yaro

Goldman Sachs Group Inc., Research Division - Research Analyst

* Michael C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Greenhill Third Quarter Earnings Conference Call. (Operators Instructions)

Please note, today's event is being recorded.

I would now like to turn the conference over to Patrick Suehnholz, Head of Investor Relations. Please go ahead, sir.

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Patrick J. Suehnholz, Greenhill & Co., Inc. - Director of IR and COO of Investment Banking & Principal [2]

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Thank you. Good afternoon, and thank you all for joining us today for Greenhill's Third Quarter 2019 Financial Results Conference Call. I am Patrick Suehnholz, Greenhill's Head of Investor Relations. Joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.

Today's call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions. Firm's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements.

For discussion of some of the risks and factors that could affect the firm's future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made.

I would now like to turn the call over to Scott Bok.

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Scott Lee Bok, Greenhill & Co., Inc. - Chairman & CEO [3]

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Thank you, Patrick. We reported third quarter revenue of $87 million and net income of $0.63 per share. For the year-to-date, we had revenue of $194.3 million and a loss of $0.54 a share. The revenue for the quarter is almost identical to that of last year.

For the year-to-date, revenue was down 26% as a result of our slow first half. Our third quarter results reduced the year-to-date revenue decline, and we expect to reduce it significantly further in the fourth quarter.

Throughout this year, we have benefited from a respectable performance in U.S. M&A, improved performances in Australia, Canada and Latin America and continued strength in our capital advisory business globally, offset by a very low level of activity in European M&A. While most measures of global transaction activity are down about 20% from last year, we continue to see the environment for M&A activity as reasonably good in most of the places we operate, and the same is true for capital advisory activity.

Restructuring activity has been relatively slow given favorable credit markets, but we are succeeding in our goal of building a much more substantial restructuring business to complement our M&A and capital advisory businesses. Our expanded restructuring team has seen a big increase in new assignments recently, which bodes well for both retainer and completion fee revenue in coming quarters and years.

With respect to costs, our compensation ratio for the quarter was 50%, resulting in a year-to-date compensation ratio of 69%. We expect to move our full year compensation ratio significantly further toward its historic range in the fourth quarter. Our non-compensation operating expenses, excluding accounting adjustments related to the earnout in our 2015 Cogent acquisition, were very similar to those of last year. Our pretax operating margin for the quarter was 29%. Our interest expense for the quarter reflects the improved terms of our recent refinancing, and it has and will continue to benefit from recent declines in interest rates.

Our effective tax rate was 23% for the quarter and 25% for the year-to-date, and we continue to expect a rate in the mid-20% range going forward. In terms of capital returns during the third quarter, we purchased 1.14 million shares and share equivalents through open market purchases and via tax withholding on restricted stock that vested during the quarter.

Together, these repurchases were at an average price of $14.43 per share, totaling $16.5 million. We also declared a dividend of $0.05 per share.

During October, we repurchased an additional 687,414 shares of common stock in the open market at an average price of $14.52 per share, totaling $10 million. And as of October 31, we had $44.1 million of share repurchase authority remaining under the terms of our recent refinancing in addition to ongoing purchases of share equivalents via tax withholding on vesting RSUs. Under the terms of that financing, our share repurchase authority should grow next year and beyond. We see our current share price as highly attractive, and we'll continue to be opportunistic as to how we use our share repurchase authority.

We ended the quarter with cash of $117.5 million and term loan debt of $365.6 million, reflecting the repayment of a principal payment scheduled for the prepayment of a principal payment scheduled for year-end. Our net debt was $248.1 million at quarter end. And going forward, we aim to continue deleveraging even as we further reduce our share count.

Looking ahead, we believe we are well-positioned for a strong finish to the year in terms of both revenue and profitability. Longer term, we are confident that the personnel moves we have made will lead to a business with increasingly diversified revenue streams as well as greater aggregate revenue.

Our acquisition of the capital advisory specialist Cogent Partners, more than 4 years ago, significantly diversified our revenue base. Following a few important hires, 2 to 3 years ago, our performance in Australia, Canada and Latin America is resulting in greater revenue diversity.

Last year, we substantially expanded our restructuring advisory team and this year, have seen the level of restructuring advisory activity improved meaningfully. A larger restructuring advisory business should provide an important offset in revenue terms during future periods where weaker M&A activity coincides with increased credit defaults.

More recent investments into additional subsectors of energy and industrials, into insurance, into shareholder advisory and into new offices in Madrid, Singapore and soon Paris should further enhance the diversity and scale of our revenue sources over time.

Recruiting is key to the expansion and diversification of our revenue base. And in the year-to-date, we have announced the recruitment of 8 Managing Directors. We currently have 79 client-facing Managing Directors. And going forward, our objective is to continue our balanced approach between recruiting new talent externally and cultivating homegrown talent internally. If it's a result of all the foregoing initiatives, we succeed in our goal of generating greater and more stable revenue. The returns to our shareholders should be amplified by both margin expansion, resulting from our cost discipline. And EPS accretion, resulting from our significantly reduced and still-shrinking share count. Add to that the fact that our firm as well as our peer group is trading well below historic valuation multiples, and it's clear what we are excited about the value-creation opportunity that lies ahead.

Our team collectively owns 46% of the economic value of our firm through stock and restricted stock and, therefore, has a powerful incentive to take full advantage of that value-creation opportunity.

Now I'm happy to take any questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions) Today's first question comes from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2]

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So Scott, so we're a month into the quarter. Just wondering, if you could kind of give us a little bit more color as to how you're expecting the fourth quarter to shape up? I guess is it possible for the revenues to be up sequentially in the fourth quarter?

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Scott Lee Bok, Greenhill & Co., Inc. - Chairman & CEO [3]

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It's not really appropriate or possible for me to sort of give quarterly forecast, and it's always this time of year when you're down only one quarter left. So it's difficult to do that. As I said, we do expect a strong finish to the year in both revenue and profitability terms. And exactly what that means in terms of dollars and cents, I think we'll just have to wait and see. But we certainly feel like we're going to have a strong finish to the year.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [4]

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Okay, great. And then on the comp ratio, I appreciate the color there. Could you give maybe a little bit more information about kind of where the range of the full year comp ratio come in at? It sounds like you're kind of targeting a more consistent comp ratio to prior years, but it's obviously kind of bounced around a little bit. So are you looking for something in the low 60s?

Is that kind of the right way to think about it?

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Scott Lee Bok, Greenhill & Co., Inc. - Chairman & CEO [5]

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I would say, it's simply going to be a function of where the revenue comes out. I mean what you saw this quarter when we had improved revenue was we had a significantly lower compensation ratio than we normally do. Obviously, what we're trying to work toward is a compensation ratio that looks like the range we've had in recent years, which is more like mid- to high 50s. And when we had a low level of revenue in the first half, obviously, that just becomes not possible. At some point, you've got a fixed level of compensation and an amount sort of bonuses, et cetera, you have to pay. But we -- by having a lower-than-normal ratio in Q3, we moved it in the right direction, and we expect to do the same thing in Q4. How far we can move it, just simply, really depends on where the revenue comes out for -- in this last quarter of the year.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [6]

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Okay. And just one more, if I could. Could you just clarify, did you say there was $44 million left on the buybacks? And then any color on kind of the trajectory of the pace from here?

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Scott Lee Bok, Greenhill & Co., Inc. - Chairman & CEO [7]

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Sure. Yes, that's $44 million left. And we're going to continue to just be opportunistic. I think we could have hurried a lot faster and frankly, would have missed some real-market dislocations, where we could get some shares at what we think are very attractive prices like we did over the last couple of months. And we're going to continue to be judicious about how we do it. Also, I just note, there's limited liquidity in our stock and there are a lot of rules around corporate repurchases that I'm sure you're familiar with. So there's a limit to how fast we can do it even if we want to. But where we do have discretion, we're going to use that to try to get the most shares as we can for the funds we have left.

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Operator [8]

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And our next question today comes from Richard Ramsden of Goldman Sachs.

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James Edwin Yaro, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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This is James filling in for Richard. The first question is just you saw a net attrition of 1 MD this quarter. Do you still expect to be able to grow MDs by -- I think you talked about 10% in the past, have there really been any changes in the hiring environment that you would highlight?

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Scott Lee Bok, Greenhill & Co., Inc. - Chairman & CEO [10]

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We're obviously going to have some movement around the margin always in MDs, and we're going to continue recruiting fairly aggressively. And as I said, we also, of course, are looking to develop talent internally as well. 10% in terms of net growth is certainly our objective. We're not going to do that every single year. Some years, we're going to do more. Some years, we're going to do less. I would say the recruiting environment continues to be pretty good. We are pleased with a couple of recent announcements we've made. We've got others that we're talking to right now. I'd say, at this time of the year, it's not at all clear. We'll announce more before the year is over, possible, but not at all certain. More likely, we're spending most of our time right now building a pipeline for kind of first quarter or so of 2020 once year-end compensation has been paid to people at various firms.

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James Edwin Yaro, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Got it. That's helpful. And then the second one is, you discussed a strong restructuring outlook for next year. How much of this is from expanding the team versus a stronger industry environment?

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Scott Lee Bok, Greenhill & Co., Inc. - Chairman & CEO [12]

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I think it's a lot from expanding the team. We made a significant move, really, starting about 18 months ago to build out a substantially larger team, mostly in New York. I think the environment has gotten somewhat better over that 18 months. Clearly, there are some sectors where there's more financial pressure, energy, retail, et cetera. So I don't think right now we're seeing the benefit, but someday we will see when the economy goes into a recession and suddenly, there's a lot of restructuring activity. What makes me most pleased about what we have seen here recently is I think it's just very clearly an increase in market share and what other firms have described as a relatively flat restructuring environment. We're really seeing our business grow pretty significantly. And I think that's just a larger team out on the field that's getting more wins.

Okay. Thank you. And I think that's our last question. So we thank everybody for dialing in, and we'll speak to you again in a quarter, if not sooner.

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Operator [13]

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Thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.