Greenhill & Co., Inc. (NYSE:GHL) Q1 2023 Earnings Call Transcript May 7, 2023

Operator: Good day and welcome to the Greenhill First Quarter 2023 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Patrick Suehnholz, Director of Investor Relations. Please go ahead.

Patrick Suehnholz: Thank you. Good afternoon and thank you all for joining us today for Greenhill’s first quarter 2023 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. The firm’s actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm’s future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, 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.

Scott Bok: Thank you, Patrick. Our revenue was $49.7 million for the first quarter, 9% better than last year’s first quarter but considerably lower than we would like as a result of what was obviously a very difficult operating environment. While the pace of transactions has been slower than usual in the past couple of quarters given volatile markets, difficult credit conditions and economic uncertainty, we are encouraged by the level of engagement we are seeing, particularly with regard to M&A interest from our corporate clients. It’s worth noting that our firm is over a relatively small size where our revenue trajectory can differ meaningfully from either results of competitors or overall changes in market activity. Accordingly, consistent with what I said in our last call, we expect our revenue improvement over last year to grow significantly in the second quarter, leading to our best first half in recent years.

There’s always less visibility for quarters further out. But as markets continue to stabilize, credit conditions improve and global deal activity rebounds from what are very low year-to-date levels, we are well positioned to benefit in quarters to come. On the cost side, our compensation costs were elevated to just over $60 million for the quarter, largely as a result of the timing of the recognition of an accounting charge related to incentive compensation. However, already in the second quarter, our absolute dollars of compensation expense will decline significantly back to a normal level. And as those costs decline and greater revenue materializes, our objective is to bring our compensation ratio down toward our target range by year-end just as we’ve done in the past few years.

Meanwhile, our non-compensation cost at just under $15 million were higher than last year’s as a result of higher travel expenses as client travel has continued to normalize post the pandemic and some one-off costs related to relocating our London office. Even with these, the level of non-compensation expense remained within our target range. Looking ahead, the London relocation expenses are now behind us and we will not be burdened by the duplicative rent we had as we made major office moves in London and in New York over the past few years. It is early in the year to draw many conclusions about our business performance by region, sector or type of advice but I can make a few points based on our early results and current pipeline. By region, we expect strong performances in Australia, Canada and Spain as well as improved performances in the U.S. and U.K. By sector, industrial is our largest focus area and that should be a productive area this year.

Mining and energy is another very active area for us, including newer green energy technologies and our health care and consumer teams are also quite busy. By type of advice, corporate M&A is where we see the most opportunity Relative to most of our competitors, we should benefit in the current market from having less of a reliance on financial sponsors than most. We are also seeing restructuring activity pick up from the low level last year when credit conditions were favorable for much of the year. While we don’t expect anything like the pandemic period boom in restructurings, we believe it could be at the beginning of a longer period of robust restructuring activity given the current economic circumstances than was the case in the brief pandemic euro restructuring boom.

Our capital advisory team continues to take on attractive new fund placement projects amid what is a challenging fundraising environment and should generate increased revenue as the year goes on. Notwithstanding that financial sponsors are not a particularly large portion of the M&A market at the moment, given challenging credit market conditions, winning more business from this client group which has enormous dry powder to be deployed once market conditions have stabilized continues to be our central strategic initiative for the future growth of our business. We believe our industry sector expertise, our cross-border capabilities and our ability to access public companies are all advantages as we work to build this business. Turning to our balance sheet; we ended the quarter with $58.8 million in cash and debt of $270.1 million.

The end of the first quarter usually marks our low point in terms of liquidity given the timing of bonuses, deferred compensation payments and tax withholding on restricted stock vesting. During the quarter, we repaid $1.8 million in principal reduction on our debt pursuant to a contractually required excess cash flow payment. During the quarter, we also repurchased 577,349 shares and share equivalents mostly the latter in the form of tax withholding on the vesting of restricted stock and that was for a total of $7.9 million. And our Board of Directors also approved our usual quarterly dividend of $0.10 per share. Our term loan matures in just under 1 year from today. Our plan is to refinance or extend that loan in the relatively near term at such time as we believe market conditions are optimal for that.

As I said last quarter, our primary focus is now on deleveraging, given the increased cost of debt. We may pay down some principal at the time of refinancing or extending our loan and in any event, aim to deleverage significantly over the next few years. I will end with a brief note on recruiting. We’ve recruited 2 new managing directors for the year-to-date, including one mentioned in our press release today. We remain in dialogue with many other candidates in what appears to be an active market for senior banking talent and we aim to add several more managing directors in the weeks and months to come. With that, I’m happy to take any questions.

Q&A Session

Operator: The first question comes from Devin Ryan with JMP Securities.

Devin Ryan: Just first question just on the outlook here. So obviously, good to hear about the continued expectation for the best first half in years. Clearly, the bar, I guess, is pretty low, just given kind of the cadence of first half for you guys. So just may love to push out a little bit further. I know you don’t have a crystal ball but just based on some of your other comments, Scott, can you maybe just frame out what the environment feels like today relative to maybe a year ago which would maybe — clearly conditions could change but maybe give us some sense of kind of the full year view. And the data we’re tracking, at least for 2Q would suggest, the comments you made about 2Q makes sense but just trying to look at a little bit further.

Scott Bok: Yes. Sure. Fair enough. Look, I think there’s kind of two things. There’s the environment and then there’s kind of what we see internally, right? And we’re a small enough firm that we’re not like an index fund that’s going to track M&A volume up and down. over the course of the cycle. I think there was no doubt we’re in what’s a challenging market for M&A transactions. And if you look at the data, sort of announcements or deal volume or whatever, year-to-date versus even the last decade or more, it’s certainly at the low end of the range. But we feel like what we’re focused on, a lot of work for major public companies that are well capitalized, don’t have a lot of challenges in terms of arranging financing for transactions.

We feel like that’s a good niche to be in. And very specifically, we’re looking at a pipeline where, frankly, it’s kind of a surprising number of quite large transactions that are quite far advanced. So Obviously, you won’t see a lot of those both announced and closed in the second quarter which means that we think we’re going to carry a fair amount of high-quality backlog into the latter part of the year and beyond. So I think net-net, we’re certainly — when we look at our own pipeline, we are more optimistic than most others, I think, sound in the market these days. And I think that’s just a function of if you’re a firm many times our size, you’re going to be really beholden to how the whole market is doing. Whereas for us, if you have — if your clients and your client focus tends to be one where there’s a lot of activity bubbling behind the scenes, then you can be a better an outlier and that’s where we think we are.

Devin Ryan: Got it. Okay. And just to dig in a little bit on that. So I get the kind of the corporate piece and you mentioned there’s some kind of large chunky deals in there as well in terms of what you’re working on. Are you seeing kind of the activity being broad-based? Or is it really specific just to kind of either some credit transactions or certain geographies? Just love to get a little more flavor for that as well.

Scott Bok: I think it’s fairly broad-based. I mean, we’re seeing — I highlighted some of the regions but I mean, our certainly — some of the things we’re excited about in our pipeline, there’s a good mix between the U.S. and Europe and Australia is a smaller market but we’re quite excited with what’s happening down there as well. We’re active in the mining space which — or there’s been some good activity and Canada continues to be a good market for us. So I think in most sectors and most regions feels pretty good right now. There’s — I’d say in sort of fossil fuel type energy, I think things are challenged just by the extreme volatility in oil prices and even more natural gas prices. But in sort of the greener energy technologies and pretty much in every other sector, we’re involved in; it’s a pretty good mix. So it’s not just 1 or 2 sectors or 1 or 2 regions where we’re seeing good activity.

Devin Ryan: Okay, great. Last one, just on the incentive charge, the accounting there. I didn’t quite follow exactly what happened. So just if you can just give us more background, if you can and whether that will also — is there any pull forward of future expense as well?

Scott Bok: Yes. Look, I think it’s a one-off in the sense that it’s just the way you pay people and how things vest and someone can sometimes lead to sort of compensation expense being sort of clustered in a particular quarter. And given that it wasn’t a real strong revenue quarter, it sort of sticks out more than it otherwise would have. But you will see our comp — our absolute dollars of comp go all the way back to a very, very normal level in Q2 and over the course of the rest of the year. So I think this will all get lost in the — in a year that will look very, very different in the other 3 quarters in this regard.

Operator: The next question comes from Matt Moon with KBW.

Matthew Moon: Just wanted to touch on the post; operating environment. Specifically curious on your thoughts on kind of the medium-term implications and the recent events impacting the commercial banking sector. And how we should be thinking about potential trickle-down impact to your business and the sector overall, just kind of given the potential for banks to hold a large proportion of capital, for example and highly liquid assets among other factors. And kind of somewhat related, how have your views kind of evolved on the upcoming restructuring cycle, if at all since these events? Would love to hear thoughts there.

Scott Bok: Okay. Good question. Look, I think what’s happened in the bank market recently has had 2 separate impacts, one, I think, somewhat neutral and one I think actually positive. If you look at our M&A business, I don’t see much impact at all. I mean, our — I would say an overwhelming majority of the M&A deals we work on the financing is coming from the biggest banks in America around the world. I mean — so I don’t think the loss of regional banks. The ones that have failed, I can’t even remember an M&A deal we did that was financed by one of them. So, I don’t think I see any real impact on — ability to do M&A deals. And as I said, our business is a little more skewed toward better capitalized larger companies anyway that probably tend to almost always bank with those larger places.

I do think it probably helps us on the restructuring side because if you — I don’t think we’re going to see a wave of like massive companies going bankrupt or near bankrupt. But I think in sort of the smaller and mid-cap type companies that may well bank at some of these regional banks or other places where credit is going to get a little bit tighter, it’s going to lead to more not necessarily bankruptcies but certainly more restructuring of debt, sometimes out of court, sometimes in court. And — so I think it probably is part of what is making us optimistic about sort of a longer term, not just boom in restructuring but a longer-term period of like a robust level of activity to keep the team busy and productive.

Matthew Moon: Okay, great. And then, just another follow-up for me. Just looking ahead at that term loan that’s due in April of next year. I appreciate that you’ve kind of in your prepared remarks, committed to continuing to focus additional capital allocation on repaying this debt ahead of maturity. But as you know, you’ll probably necessitate a refi extension or alternative capital solution. So with this in mind, I was just wondering if you could kind of provide more specifics on how you anticipate to address this booming maturity, particularly if like the market environment continues to remain challenged in a similar way as we’ve seen between now and then would — yes, I’d love to hear your thoughts there as well.

Scott Bok: Sure. I mean as far as the environment goes, I mean, from the firms we’re talking to about refinancing, I think the market’s actually gotten quite a lot better just recently, certainly than it was at the height of the bank crisis. And if you look at some of the so-called reverse flex that’s happening in some of the deals being priced. So it feels like it’s getting better. But I think if you also overlay that with my comments about how we see the year playing out in the second quarter and what we’re expecting in terms of a visible pipeline building for the second half, I think we’re headed toward a period that will be optimal for us in terms of what our results will look like and what our trailing 12 months, kind of metrics will look like, that lenders like to look at.

And I think there’s a very good chance that aligns with what’s already a bit of an improving environment. But I don’t worry about it too much. I focus mostly on our results. I think if our results are good which I think they will be. I think we’ll easily get a refinancing done on the right kind of terms to go forward. So — but the reason we’ve just kind of weighted maybe a little bit longer than we might have is because of the way we see the quarters playing out and we’d rather go to the market in a period of strength which we think will be at soon rather than at this immediate moment.

Operator: The next question comes from James Yaro with Goldman Sachs.

James Yaro: If we just turn to the private fund advisory business, the fundraising backdrop for sponsors has certainly been weaker recently. And I think the outlook remains challenging looking ahead. So I understand that you’re winning more mandates and the business is performing well at your firm. But maybe you could just speak to the broader market trends in the various verticals in which you participate in that business.

Scott Bok: Sure. I mean there’s no question that, that is — it’s a challenging fundraising environment and I’m glad that’s a very — really a very small part of our business as compared to M&A or restructuring. We’re still in the building phase in terms of primary fundraising. So we’re winning high-quality mandates. We’re getting closing some. We’re raising money but it’s a slower process than it isn’t sort of more typical market conditions. But I’d also add that on the secondary side, things are quite busy. I mean, for kind of the same reason. The institutional investors want liquidity that makes them may be less likely to commit to a new fund but it maybe makes them more likely to sell a portfolio that they’ve been invested in over the years.

So that part of the business has been pretty active. And on the primary side, I think we’ll get to a good place. We’ll get these fundraisings done with decent outcomes but it’s just going to take longer for any fund, I think, that’s out there to raise whatever their target funding is than it would in kind of a more normal financing environment.

James Yaro: Okay, that’s very clear. Maybe you could just speak to — on the restructuring side, what parts of the market are driving the positive outlook? Is it rescue financing? Is it liability management, traditional Chapter 11, etcetera?

Scott Bok: I think it’s a lot of liability management. I don’t — and I think we probably always strive for our clients to help them come to an out-of-court negotiated solution and an in-court bankruptcy solution. I mean sometimes at the very end, you might put something through bankruptcy just to put a — get an agreed deal implemented. But I would say we’re very much in the middle market and with a leaning toward significant sized companies but ones that are trying to either proactively manage their liabilities or even if it’s a bit more urgent, try to come to a restructuring as they can do out of court.

Operator: And we have a follow-up from Devin Ryan from JMP.

Devin Ryan: I just want to come back to the restructuring point. Just given kind of the acceleration in activity, I appreciate we’re coming off of a relatively low base here. But is the expectation that we’ll maybe see some of that revenue year-over-year coming through in the back half of this year? Or are you seeing it much more as a 2024 story? Just trying to think about the contribution to maybe the full year outlook this year.

Scott Bok: Yes. I think very much this year and really, in fact, even already in the second quarter, we’ll start to see the restructuring pickup versus what was a very quiet year last — I mean you think about a year ago, I mean, credit markets were wide open and very, very little restructuring activity. So I think we’ll start to see a positive differential, frankly, in Q2 and going forward from there. Okay. I think that’s our last question. I appreciate everybody dialing in and we will look forward to speaking to you again next quarter.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.